 Income tax 2021-2022, software example, reporting self-employment tax. Get ready to get refunds to the max, diving into income tax 2021-2022. Lister tax software, you don't need tax software to follow along, but you might want the form 1040, which you can find on the IRS website at irs.gov, irs.gov, starting point, single, file or Adam Smith living in Beverly Hills 90210. We're going to have to flow through from the Schedule C net coming in here at the 100,000. Let's take a look at that flow through. We got the Schedule C here starting with the Schedule C being, by the way, profit or loss from business 120 at the gross. Then we got the 20,000 expenses to get us the net of 100,000. That rolls into the Schedule 1, Schedule 1 being called the additional income and adjustments to income line three. That then rolls into page one of the form 1040 on line number eight. Then we also have the self-employment tax. That's going to be our focus here, which is on the Schedule SE. So that's going to be the Schedule SE self-employment tax. And we'll dive a little bit more into this calculation. We looked at it a bit in the past. So then we'll also look at some kind of more unusual type of situations where we might have like two Schedule Cs, for example. So we've got the 14129 here. That then go into the Schedule 2. Schedule 2 being the additional taxes, self-employment tax. That flows through to the form 1040 page number two. And there's the 14129. Half of that is deductible above the line. So if I go to the self-employment calculation again, half of that 7,065 is deductible above the line. I won't get into too much detail about the justification for that, but it's kind of similar to the payroll tax type of situation. But for now, that 7,065 is on Schedule 1, page number two. Schedule page number two, the adjustments to income. There's that 7,065, which flows then to the 1040 page number one. There it is. So we've got the adjusted gross income at the 92935, the standard deduction, the 12,550. We've got the qualified business income, letting the software calculate that at the 1677. And then we've got the taxable income at the 64308, mirroring that over on our Excel worksheet, 100,000 coming from Schedule C, income minus expenses. We then have, I'm going to skip down here, the added tax, self-employment tax, that is calculated over here on the additional tax. We might go into this a little bit more detail, but we did this in a prior presentation. So I won't go into it as extensively here. We'll take a look at some other things related to the self-employment. But that comes out to the 14,130. So there then is the 14,130. Half of that's deductible above the line, the adjustments to income, which we can see in the adjustments to income tab, which is taking half of the self-employment tax. So that is here, that gets us to the 92935. We've got the standard deduction, 12,550. I'm pulling the 1677 in from the software, letting it calculate it. And then we've got the 64308. So there's the 64308 page two then, calculating the federal income tax at the 9,900. So here is the 9,900 plus the 14130 gets us to the 2430 for the total tax. And that should match or be close to the 2429. We see here dollar difference due to rounding. Okay, so we'll do a quick recap on the self-employment tax itself. So I'm going to go into the schedule C. You'll recall, and we took a look at this in a prior presentation. So I'll do this fairly quickly. The net here is what we're going to apply the self-employment tax to, which you can think of as kind of similar to the payroll taxes, and that it's Medicare and Social Security, but it's being applied to the net item down here, as opposed to if we had, say, wages up top, and we were calculating the Social Security and Medicare on the wages. In that case, we would be the employer here, and we would be then withholding the Social Security and Medicare and then paying our portion of it. If we were an employee of another business, then we would be paying our half of the Social Security and Medicare in the wages that are withheld. So this is kind of the similar process for the self-employed individual taking the net income and then bringing that over to the schedule S.E. The calculation then is going to be that net income multiplied times the 92.35, and then we've got two components of it, which is going to be the Social Security and Medicare. The rates that are used are the 12.4 and the 2.9, which if you are familiar with your W-2 withholding is basically twice what is withheld on your W-2 if you were an employee because, in essence, we're charging the employer and employee portion of it. That's how we're calculating this starting point at the 14.129. So let's just consider that on our worksheet where we did it maybe a little bit more transparently in a prior presentation on the additional tax. We took the 100,000. We multiplied at times the 0.9235 to get the 92,350. Now we still have to break out the Social Security component and the Medicare component because the Social Security has a cap on it at the 142.8. So you're not going to be paying any more self-employment tax. You're not going to be paying any more Social Security above that amount, although the Medicare doesn't have a cap and they actually have an added amount that you would pay over a certain threshold. So that means if we compare the cap to the 92,350, the 92,350 is lower. So we're going to take that. We use an if-then function to figure that. Then we've got the rate at the 12.44, which is twice the 6.2%, which you might be familiar with as an employee that's withheld from the W-2 wages. That's where we get the 11,451. That's the Social Security component. And then we've got the Medicare, which we're going to take the 92,350, our wages multiplied times that 0.9235, times the 2.9, which is twice the 1.45, which you might be familiar with as the Medicare half if you were a W-2 employee that would be withheld. That's going to give us the 2678. That's where we're getting that 14,130. Now half of that, we get to deduct above the line that we saw here on page one due to the fact that it's kind of similar, like if you were a C corporation, you would get to deduct as wages the expense for the payroll and then you get to deduct the payroll taxes. But I can't deduct the payroll taxes, which is half of basically the payroll, the Social Security and Medicare in essence. I can't do that on the Schedule C and mirror that and come up with a similar situation for the sole proprietor because we used the bottom line of the Schedule C to figure the taxes. Therefore, we had to put it somewhere else, so it goes on the Schedule 1 and flows into the 7065 here. So that's the general concept. So now let's look at some kind of deviations from that. Let's look at the cap first and then we'll look at the added Medicare tax that could be calculated. So if, for example, the income went up, so let's imagine we're at the 320 of income, 20,000 of expenses, that's 300,000 now of the earnings. So that's going to hit the cap for the Social Security part. So if I go to the SE tax then, now we've hit the cap here. So we're going to be capped off at that 142.8 instead of being taxed at the greater amount. And so that's one thing to kind of keep aware of. You're going to have that cap that will be involved. If I go back on over here and I check that out in our worksheet, which might be a little more transparent, and I made this 320,000, that gives us our 300,000, pulls over to my additional tax, 300,000 times the .9235 gives us the 27750, and then we're capping it, however, for Social Security at the 142.8. So the 142.8 times the 12.4 is that 17707 portion for the Social Security. The Medicare has no cap, so it's still being taxed at the 2.9. That gets us up to the 834, and that's where we're getting this 257.42, in essence, the 257.41, 742 here. Now the Medicare tax actually goes up after you hit a certain threshold, and you can see that. You have to calculate it on a different form, which is the form 8959. It's called the additional Medicare tax. So I might then add that. I might not put it on another schedule. I'll just put it on maybe the same schedule here, and let's put it maybe to the two... Well, let's add it down here. So we're going to say this is going to be form 8959. So I'm going to say form 8959, and this will be called the additional Medicare tax. Additional Medicare tax. Additional Medicare tax. We'll make that black and white for the header. Let's do that, as has been our standard. And then that we can calculate by taking this subtotal that we calculated after the 0.9235 adjusted self-employment income. And we're going to take that, and we're going to say everything that is over the threshold of the 200,000 is going to be subject to that added tax. So I'll put the threshold threshold. I'll call it... I just made up that term threshold of 200. And then the difference amount subject to tax is going to be equal to the 27750 minus the 200,000. And then the tax rate is... They said the tax rate was the 0.09%. So 0.009. So it's pretty low, 0.009. Let's make that into a percent. Home tab, number, percent to find it. Add a couple of decimals. Put an underline on it. Let's do that. And so the added tax. So the additional Medicare tax. Outer column is this times the 0.09. So that's another 692. Let's format it without the decimals. Take out the pennies, same formatting. So that gets 692. So that looks good. So then I'm going to sum that up. My total down here. Additional taxes. I'm going to bring this total down. I'm going to cut that, cut it, and put it down here. And then sum up so it adds... So it adds all the taxes involved. So alternative minimum tax. Okay, so these are all the taxes. So it comes out to the 26435 now. And that then pulls into the first page, 26435. And if I was to see it here, this pulls into schedule 2. So schedule 2 now has the 25741 and the 693. And that then is going to pull into the page 1 of the form 1040 on the additional tax line. Additional tax line on page 2. 26434. So we've got the 26434. So that's, you know, just to get an idea of those caps. Now the other thing that you got to worry about or you've got to be kind of concerned with or understand is that you might have wages on the W2 income and you could have wages from the Schedule C. And so in that case, let's just take a look at what that would look like and why that's a problem. It's a problem in part because of these layers that we have the progressive system where there's a cap on social security and possibly that added amount for Medicare makes it not just a flat tax. So that means that if we have multiple things subject to the tax, it gets a little bit more complex. So for example, if I went back on over and I said, okay, what if we bring the Schedule C back down to 320,000? So we've got, let's bring it back down to 120,000. So now we've got another 100,000 here. We've got the 100,000 there. And then let's say that we had like 80,000 W2 wages. So now I've got W2 wages too at 80,000. And the reason that's an issue is because the W2 wages are going to withhold the social security component of it, which is 4,960 in this case. And that's going to put us over the cap because this 80,000 plus the 100,000 that we made on the Schedule C is over the threshold of the cap for social security of the 142.8. Now, the funny thing here is that this rate right here is lower because we're only taking half of it because we're an employee. So we would like then if we're going to hit the cap to be paying this out of our W2 income and first, right, before we're subject to the other rate, which is basically twice as much on the Schedule C. So if we look at what this looks like, we're going to say, okay, so I already paid out of the withholdings for the W2. So now if I calculate my Schedule SE, I've got the 100,000, there's the 92,350, but then it's bringing it down by 80,000, which is the W2 wages, which we're already subject to self-employment tax or payroll taxes, which is social security and Medicare, although only the employee half of it. And so that then brings us to the 62,800. So we could try to mirror that on our worksheet over here. We can say, okay, what if I tried to mirror that just so we can get an idea of what is happening on the additional taxes, the additional taxes. So that would mean like right here, I'd have to say, okay, that 277,50, I'm also going to deduct any W2 wages from it because those would already have been subject to the self-employment tax or the social security and Medicare if I had any. We're mainly going to focus on the social security because it has this cap that is going to be involved. So let's make our adjustment. I'm going to go to the Schedule C. Let's bring that back down to 120,000. So the total, I'm sorry, 120,000. So the total is at the 100. And then we're going to bring that back on over and we're going to go to the W2 income and say that we had W2 income, let's say of, I said 80,000, 80,000. And so now we can reconstruct our calculation over here with that W2 income for our social security tax. Now note, you also got to be kind of careful with the W2 income because and the Schedule C because if you had like a married couple, for example, it's important to allocate the proper amount to each of the spouses because the social security is not going to be assigned per married couple but per a spouse. So you got to kind of keep that in mind as well. I'm going to add a couple rows under the social security income cap here. So I'm going to add a couple rows here. I'm going to say insert. And let's say that we have W2 wages, W2 wages. And I'm going to say the wages were already subject to the social security, if only the half of it, the employee or employee part of it, and that's going to be the 80,000. So now we have that there. So now we've got the difference. So we've got the cap less the W2 wages. Let's just call it that's going to be equal to the 142.8 minus the 80,000. And so now I have the social security income of the 92,350. And then I've got and then I've got the amount that's remaining for us to get to the cap. In other words, I can have I can then go from to another 62,800 before hitting the cap. And I have income of 92,350. So I'm going to take now the smaller of these two numbers, which means that basically we allowed the eating up of the cap of the W2 wages first, which is kind of the beneficial thing to the taxpayer, because that means you're paying only the half of the tax the employee portion. And then we're going to go the rest of the way up until the till we hit the cap with the schedule C portion. And that's what we're going to apply the self employment tax on. So what I'm going to do is I'm going to move this one up. I'm going to move this one up. Not that I don't want to adjust the size of the cell. I just want to move it. Let's cut and paste it cut and paste. And then I'm going to copy this format down, copy the formatting down. And then I'm going to take to adjust the name. I'll call this social security income from schedule C. Let's say, and this is going to be a social security income subject to tax for tax. And I got to take the lesser of these two numbers. We're going to take the lesser. So I'm going to use an if kind of calculation a logic function. So I'm going to say if brackets. And we're going to say if this number, the social security income number is less than if it's less than where that's not less than if it's less than this number, then that's when you say the comma, then that's what the comma means. I want you to use that number. But if it's not, that's what the other comma means. But if it's not, then I want you to use this number. Close up the brackets. Okay, so I picked the smaller of the two numbers. If this number was larger at like 100,000, then it would pick the smaller of the two numbers. So that's going to be our idea. So now we've got the tax that should be calculated and it should be calculated on this number. So let's change this should be this times this. And so there's the 7787 and that gets us to the 10462. We don't have any cap on the Medicare, although we might have that added tax, which I'm not going to get into now because it's a smaller tax. I kind of just want to focus our time here. There's the 10465 where we kind of mirrored the 10465 here. So there's that type of adjustment. If you had W-2 income, you got to be careful of that and be careful of kind of like the spouses and that you're applying the proper income to the proper spouse so that you can hit that cap in the proper way. Now let's take a look at another scenario. Let's say we go back on over and we don't have the W-2 income. Let's take the W-2 income out now. No W-2 income, but we have multiple schedule C's. Let's say for one individual, not two spouses with two different businesses, but one person that has two separate businesses that we can then report. So we got the one schedule C. I'm going to add another one. I'm going to add just the minimum amount of data and let's just see if I could just put the numbers down here and let's say on the second one, 50,000 was earned on the second schedule C. So if I go back on over to the forums, schedule C. Now we've got two schedule C's. We've got the other ones just schedule C-2. So there's the 50,000. The restaurant has 100,000. Now when I go to the schedule S-E, you would think maybe you need two separate schedule S-E's, but no, you've got the one because the two sources of schedule S-E income are going to the same, they're allocated to the same person. So that means we can put them both of their incomes on like the one schedule C or this one schedule S-E because they're going to be the beneficiary as we report the income. The income that we're reporting here to the government is going to then be aligned to calculate their benefit program. So now even though we have the two schedule C's, we've got the one schedule S-E. Now note that's different than if you had a husband and wife situation, which we talked about in the past. I won't go into that in a lot of detail, but if you had like a husband and wife situation with that have one business that are both working on it like as partners, for example, I'm going to delete this business and go back up to the restaurant. Then we could say, okay, if they were, if it was the taxpayers, if it was the spouse, then it would be applied to the spouse. Let's change the marital status here and say they got married. Adam got married to Eve. And so then we could say a joint, if it was a joint return, I'm going to go back on over to the forms. And remember on the rules, I won't go into the rules for these joint returns, but with a married status, you got to think about whether you're in a community property state and whether or not you could file one schedule C with the two spouses or you can the other way you could do it is treat as a partnership with a 1065 or make an election to kind of break out. But the important thing I just want to point out here with regards to the schedule SE is now even though we have one schedule SE because it's basically owned by two individuals even though they're married and they're one person for federal income taxes, for self-employment tax, for social security in particular, and Medicare. We're talking about the money that they put in because they're going to get the benefits back. And so we have to apply this out to each individual. So if you're talking about a married couple, it's important to apply out the tax for social security and Medicare to the proper spouse so that they get the proper allocation to their benefit program. And that means that we would need to schedule SEs for each of the spouses. So now we've got Adam taking half of it in this case and Eve. Again, note that the way you treat basically a sole proprietorship we talked about in a prior presentation if it was for a married couple because now it's basically a partnership but the two individuals are married. So you might have some potential workarounds depending on if you're a community property state with regards to the reporting of the taxes that'll make it easier. But just note that as you do that, you're still going to have to break out the self-employment tax. It's not going to have any different effect on the federal income taxes or the tax returns that you're paying to hear most likely, but it will have an impact on who's getting allocated the benefits for the social security payments in the future. And that's why you got to get that done correctly. So those are basically the scenarios to take a look at. Also just realized that you could of course have then W-2 income that would be for the two spouses that you want to make sure that you allocate them in the software to the proper person so that if you hit any cap kind of situations that those again are allocated to the proper person for the calculations of the self-employment tax.