 Here we are in our example, Form 1040 populated with Listert 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, we got the single filer Mr. Anderson Living in Beverly Hills, 90210. No W-2 income because we've got the Schedule C income. Let's look at the flow throughs from that that comes from the Schedule C which is the profit or loss from business income statement format income minus expenses the net then rolling into Schedule 1 which rolls into the Form 1040 line number 8. We also have self-employment tax we have to deal with which goes from the Schedule C bottom line net income into the Schedule SE self-employment tax calculating social security Medicare self-employment tax 14129 in this case going to the first page or second page of the Form 1040 I should say there is that item then half of that's deductible on the first page as an above the line deduction right there and adjustment to income we could see that flow through coming from the Schedule C net income flowing to the Schedule SE to calculate the self-employment tax half of that then flowing to Schedule 2 and I'm sorry Schedule 1 page 2 there it is that flows to the 1040 page number 1 so we got the 100,000 minus the 7,065 gives us the 92,935 then we got the 12,950 standard deduction and then we have the qualified business income deduction calculated by the software to get us to the 63,988 if we go to page number 2 tax calculated at the 9692 we've got that added to the self-employment tax 14129 gives us the 23,821 we're going to imagine we paid in 30,000 for a difference of that 6,179 all right we're focused in on however the Schedule SE over here and we're thinking now about putting money into a some type of retirement plan now oftentimes the thought process for a small business is something like this if you have like a sole proprietorship and it's your business you're thinking all right if I if I was an employee and an employee employer situation I might have access to a 401k plan which is one of the biggest benefits you know you get as an employee and and that would allow me to put money in and get a tax benefit when I put it in and possibly have some matching so I don't have that over here with the Schedule SE I could put money then into an IRA but I'm limited on how much money I can put into an IRA so then maybe I think about maybe I can set up my own like 401k plan but the 401k plan is too complex to manage and it's costly to manage so maybe I set up a simpler format with the same kind of goal of putting more money away than I could put into an IRA like a simple or a step that's usually the thought process but then of course if you have employees you can also think about what what benefits could I give to my employees to maximize their benefits that I'm paying to them as well and then what is what are the requirements so that I can maximize my amount I could put into like a step and also deal with the fact that I'm going to I'm going to have to do some kind of similar situation for employees if I have the employees all right so let's just think about those scenarios just to see where they kind of fall in the tax software and the similarities and differences now if you were a W2 employee it would look something like this right if I went if I let's just imagine we had a W2 if you had a 401k plan in a W2 type of thing then let's say let's say like your wages were 50,000 and then your federal income tax is whatever it is 5,000 let's say and then your social security and so on and so forth and then in box 12 I believe it's going to be you'll have the amount that you put in to say a 401k if you're another kind of employee like working for the government or 403b or whatever and let's say it was 10,000 so that what that would indicate then is this box in wages up here is not including the 10,000 that you put into the 401k in other words box one of the W2 may be lower than I think box six or the Medicare wages box because whatever the Medicare wages box is because and that's how you can kind of see that your actual wages was higher they deducted it already from the federal income tax income number on the W2 and so when it flows through then to the form 1040 that 50,000 is actually short by 10,000 you already got the deduction right it already got reduced because it never hit the the return in terms of federal income taxes because it was taken out on the W2 by the employer okay so what if now let's compare that to like okay now I'm a sole proprietor I don't have that so I don't have any capacity to put in there and reduce my wages I'm still paying wages on my schedule C down here kind of like income shouldn't I get like a benefit of some kind well if you don't have any any plan set up you can still put money into an IRA so that works in a similar fashion because if I go over here instead of reducing the income line it's going to be an above the line deduction it's going to be an above the line deduction not an itemized deduction so you can think of that as like an adjustment to income in a similar way as just reducing income itself which is what we do on the W2 in essence