 Income tax 2022-2023 self-employment SE tax example. Let's do some wealth preservation with some tax preparation. Here we are in our example Form 1040 populated using LISERT tax software. You don't need tax software to follow along but it's a great tool to run scenarios with. You can also get access to the Form 1040 related forms and schedules at the IRS website irs.gov, irs.gov, starting point, single filer, Mr. Anderson, no dependents, the income coming in from the schedule C to line 8 here. Support accounting instruction by clicking the link below, giving you a free membership to all of the content on our website, broken out by category, further broken out by course. Each course then organized in a logical reasonable fashion, making it much more easy to find what you need than can be done on a YouTube page. We also include added resources such as Excel practice problems, PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. Let's see that flow through process on the schedule C, business income, that's not the schedule C, it's right there, which is in essence an income statement. Income minus expenses gets to the net income 100,000 in this case flowing through to the schedule 1 and there is the 100,000 line 3 that flows through to the bottom of the schedule that flows through to the 1040 page number 1 line number 8. So there is that item. Then let's jump to the taxes which are going to be the equivalent of the payroll taxes, the self-employment taxes which are on page 2. We have the normal federal income tax but also the other taxes down here on line 23. That's our point of focus this time. How did that get there? Well that came from the schedule C where we have the net income which was then used that 100,000 to calculate schedule SE self-employment tax and then they calculated the self-employment tax right there, the 14129. That then pulled into the schedule 2 which is right here on the schedule 2 and that pulled into page 2 of the form 1040 right here. Then we also get to deduct half of that which we'll get into more detail in a second but that is seen on page 1 right there. So where did that come from? Well that came from the schedule C that had the 100,000 that then calculated the schedule SE based on that of the 14129 and then we got to deduct half of it, 7,065 that flowed into the schedule 1 page number 2 which is the adjustments to income, the above the line deductions of the 7,065 that totals up at the bottom there, flows into page 1 and there it is on the 7,065. We've got the 12,950 standard deduction, nothing unusual there and then we've got this other qualified business income deduction which once again is basically taxed or calculated based on the schedule C I'm not going to get into that now, we'll let the software do the calculation for now 15997, significant calculation obviously gets us down to the 63988 If I go to page number 2 we got the federal income tax calculated as we would normally think then we added to that the self-employment tax to get us to the 23821 and then we're going to say that we had estimated payments of 30,000 to get to the 6,179 So that was our starting point. Let's put that into our tax software or mirror it over here We've got the 100,000 that we started up top with We have the tax calculated on it and that is populated from the schedule S Schedule C, income statement, 100,000 The tax is being calculated in our other taxes I just populated it from the software, we'll dive into that in more detail this time which pulled into the tax line down here Half of that tax then is above the line deduction which is being pulled in from the adjustments taking half of that other tax on other taxes divided by 2 which is being pulled in here There's the 92936 which is mirrored in our software and then we had the 12,950 standard deduction the other, the qualified business income which I pulled directly from the software just data inputted in there and then the 63988 we're off by a dollar that's okay page 2 doing the calculation using the software 9692 which I pulled in and then the 14129 was pulled in that we looked at before, 23821 is our calculation and then we get to the 6179 Okay, so our focus now is on the self-employment tax So we might go into more depth on the calculation of the self-employment tax in a future presentation but let's just understand it in concept right now and do a little bit of the calculation with it You can imagine scenarios where it gets kind of more complex if you've got multiple schedule C's or multiple items subject to self-employment tax and you have W2 income possibly subject to self-employment tax so we might talk some more about those situations later but the general idea is that if you have schedule C business then you're not only going to have the income tax which obviously we would think we would have when populating the form 1040 because that's what we're used to dealing with deal with it but possibly always also have and most likely have if we have income the self-employment tax so the self-employment tax is on the schedule SE in essence taking our net income and put in taxing the net income so remember this is the way to understand this in your mind is say they're trying to mirror what is happening in a payroll tax type of situation between an employer and an employee but in our situation we are kind of the employer and the employee so if you imagine the schedule C then we've got the income minus the expenses is the net income what we don't have in the expenses what would be on a schedule C because you would have employees we don't have W2 income you can imagine a situation where the IRS forced us as they do if you have like an S corporation situation to pay ourselves a W2 so that we can then calculate the payroll taxes normally with the 941s, the 940s, the W2s and so on do that whole thing but they don't make us do that on a schedule if we're the only kind of employee of our business because that would be very tedious to do so what they're going to say is we think that you are an employee of your business and all the net income that you've received I think I received something from them we're going to assume coming from your labor, your work and we're going to call that income so that's kind of similar to W2 income of course we're going to flow through the first page of the 1040 and be taxed as ordinary income it's just not coming from a W2 and then they're going to say we're going to treat you like you're an employee of your business and we paid you that 100,000 NW2 income in essence and we're going to call it not payroll taxes but self-employment tax so now I've got to deal with the self-employment tax and my net income now note that that could be good or bad if you have a decision to be either a contractor or a W2 employee there are pros and cons because when we calculate the self-employment tax on this 100,000 if for example you were an employee and got paid 100,000 your self-employment taxes would be far less because you're only going to be paying the employee portion and you're going to be paying more if that 100,000 if you have the same 100,000 here but if you're a business you get to deduct expenses which you don't get to do if you're a W2 employee and of course you have more freedom as a contractor so it's not a cut and dry thing there are pros and cons the government's trying to format things so that everybody has an incentive to be in a hierarchy employee-employer situation because that's where they have the most control that's where they can force the employers to do the withholdings and issue the W2s so they kind of like that situation you can imagine anytime you talk with some IRS documentation they're pushing, they're leaning towards making a situation where there's an employee-employer situation you can see that with the gig work for example these days they would like to force the gig work expanded and just exploded new entrepreneurial businesses they would like to force that into a structural framework of employee-employer situations so that they can get paid W2 employees and make the employers their tax collectors so just be aware of that when you're looking at this stuff so if I go to the schedule C then I'm sorry the SE we've got the 100,000 and there's a little bit more messy of a calculation but the general idea is you can see that there's a $147,000 cap on the social security part and the Medicare part isn't capped and you basically get down to the $14129 again we'll jump into the more detail later but you can see here the general rate is the 12.4% for social security Medicare and the 2.9% for the I'm sorry 12.4% for social security and 2.9% for the Medicare although they did a little bit of a reduction here from the 100 to 92,350 so it's not really exact but imagine if you were a W2 employee for example you would be paying .062 your half of self-employment tax plus .0145 your half of the Medicare you'd be paying that amount on the full $100,000 so you'd only be paying $7,650 which is a little over half because again they did this business of bringing it from 100 down to the 92,350 here so you're paying more if you had that same $100,000 as a Schedule C versus a W2 type of situation but if you have a Schedule C you get to deduct expenses and that's how it's kind of lined up here so there's that $14129 pulls into the Form 1040 page 2 and here's our federal income tax and then there's the self-employment tax most people are not used to seeing that tax on the Form 1040 being when they're a W2 employee because you think of the Form 1040 as just calculating the federal income tax because if you were a W2 employee you would have the data input on the W2 in other words when you look at the W2 you've got the wages the federal withholding the Social Security and the Social Security tax but the Social Security and Social Security tax you usually don't have any impact on the Form because they've already been taking care of like an informational type of return unless there was a problem like you had multiple W2s and it went over the cap okay so that's the general rule now if I compare this to what happens on a Schedule on a C Corporation it's still not exactly fair to the sole proprietor because now you're saying look you're treating me as if I'm an employee and employer for that $100,000 but if it wasn't a C Corporation with an employee and employer the C Corporation would get to deduct half their portion of the Social Security and Medicare so I should get to deduct part of the Social Security and Medicare so they tried to mirror that but you can't deduct it on the Schedule C because if I deducted it up here on the Schedule C it would change the $100,000 creating a circle reference somewhere else therefore we're going to get half of that amount that we calculated which is $7,065 that's why that pulls up to Schedule 1 page 2 where we got that $7,065 so now we're getting half of it to be deducted and again the point is they're trying to mirror what happens for payroll taxes on a C Corporation type of business now the other side of this messy is that your this Social Security is being paid into is being paid into the Social Security for the taxpayer so that means that it's going to affect the benefits that you're going to get hopefully if Social Security is still around by the time you retire so you want to be able to maximize your Social Security benefits as we saw in prior presentations that gets a little messy when for example you have a married couple that has a Schedule C business and you're trying to maximize the amount that's being paid into the Social Security between the two of them because even though they're paying taxes on one as one a tax return the Social Security is tied to the Social Security number it's tied to each individual so we talked about in prior presentations that situation where you might be able to have a Schedule C that is that is applying out to joint between both of them if you're in a community property state or possibly a breakout with two Schedule C's the amount that's going to each individual so that you can adjust the amount that should be going to the proper Social Security payments which means that you'll end up with two of these two of these Schedule SEs that will be applied to the proper Social Security number so that it'll pay into the Social Security system so that's going to be important and it's one of those things that you don't really think about when you're actually doing the tax preparation because you're trying to think about how much you're going to pay today and that doesn't really affect that calculation but it does affect the payout that you're going to get out of the Social Security at the retirement age now the other thing to keep in mind is that as this increases there's going to be a cap on the amount that is for Social Security so and that's where that 147 comes in so if I was to go over here and say let's say the Schedule C income let's make this 180,000 so now my Schedule C income is our 160 that's over the 147,000 cap so that means that even though I made 160,000 for the amount that's attributable to the Social Security I'm only going to be paying tax on 147,760 and then for the amount so that means the amount that's paying for Social Security is 147,000 times 1.124 that's where they're coming up with this 18228 and then the other instead of it being 160,000 times 0.124 right and then the amount that's the Medicare part is going to be taxed on the full 160,000 times the 0.2 times the 0.029 times the 0.029 so there's a cap on how much you pay and that cap is of course due to the fact that as you pay more money into the Social Security Security numbers, tax records you're not getting any more benefit because we're thinking of the Social Security more like a retirement program for everybody a federal retirement program and so if you go over a certain threshold you're paying a lot more money in but you're not getting any more benefit from the payout that's going to happen at retirement is the general thought process there now things can also get a little bit messy if you had a situation where I had like W2 employee wages as well, let's say I worked as a W2 employee E2 so now I've got let's say I made you know 50,000 here and whatever with holdings and now I paid in another 1,100 already with the wages from the W2 wages so now I've got this situation where I'm actually over the threshold because I paid in with the W2 wages and I paid in with the self employment tax so you can see what kind of happened here they've got on box 8a total Social Security wages tips that were paid in so if the 147 or more skip lines so there's the 50,000 that brings it to the 97 so now they took the cap of 147,000 minus 50,000 gets us to that 97,000 that they multiply times the 0.1224 to get to what 97,000 times 0.124 0.1228 so that gets a little bit messy there as well and notice what happened they actually lowered the self employment because now you can see that I paid in the self employment with my wages but with my wages if I was working for someone else I only paid half into the self employment see the tax being calculated here for self employment is 50,000 times 0.062 that's where they're coming up 3,100 so now I would like them to they did it the favorable way meaning they took the wages that I paid at the lower half rate and only paid the employee portion and then lowered the amount of self employment tax that I paid that I paid over here that was over the cap because they could have done it the other way it would be more difficult to do that because the withholdings have already been taken but if I had to pay the wages over here on the self employment I would have had to pay basically the employee and employee or portion so that's the general idea of the self employment we might dive into the actual calculations and maybe recreate the calculations on our Excel worksheet in a future presentation but the general idea is you want to think about it similar they're trying to mirror the situation for payroll taxes with the self employment tax they're trying to take your schedule C and say your net income is now kind of like W2 income and that it's going to be subject to social security and Medicare both on the employee and the employee or side that's what the self employment tax basically is that's what this worksheet is basically doing they're kind of calculating your social security Medicare in a similar way as with a corporation employee or situation and then they're trying to adjust for the problems that happen including you should get to deduct half of that if it was an employee or situation and that's why you get the deduction on the schedule 1 page 2 and then now that you're paying into the social security you also just want to think about what's going to be the benefits you're going to get when you get the money back especially when you have more complex situations where multiple people are involved like spouses involved and that their benefits will be based on each social security number not as one entity one married unit