 Income tax 2021-2022. Software examples. Schedule C impact on tax return using tax software. Get ready to get refunds to the max diving into income tax 2021-2022. Listener 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 got the 100,000 W2 income to start with. 12,550 standard deduction. Getting us down to the 87,450 at the taxable income. Mirroring that in our income tax equation. 100,000, 12,550 and the 87,450. If we go back to the tax software and look at page numero dos. Number two that is 15,15 tax calculated. And we're going to mirror that on our tax software as well with the 15,15. Back to page one. We're now going to make an adjustment and move to a schedule C type business and try to mirror the same kind of income level to see all the different impacts that will happen just by adding the schedule C type of business. And if you're a tax preparer or if you're doing your own taxes, but if you're a tax preparer in particular, you want to be thinking about what kind of returns you're going to be focusing in on. Because if you're thinking about doing business returns, it's quite likely you're going to spend a lot more time doing possibly some accounting type of work because a lot of small businesses in particular might not have the perfect set of books and they might need help with that. And you're also going to have to do more research and some more data input into the system and be able to visualize and understand more things that are going on within the tax return and most likely be able to make projections into the future so that you can calculate estimated tax and have tax questions as people go through the growing pains of their business, hopefully their business growing and the tax implications that will be involved with that. Or are we going for a smaller type of business where we're not trying to do as complex of a business tax returns, for example, and possibly wanting to focus on tax returns where we can automate the system? There's some software out there that basically you can use tools to kind of try to do the data input from a scanned document of all the W-2s and 1099s and whatnot. And to do that, you need tax returns that kind of fit into a set mold which basically the schedule C often will break that mold. In other words, if you're just going to use the data input forms to populate the tax return and want to automate it as fast as possible and be as efficient as possible to try to do as many returns as you can in like an automated fashion, then you want returns that are basically going to fit into a standard mold and that means that the complexity of returns usually at the higher income level and or complexities like business returns can make things more complicated. So just keep that those kind of things in mind as well. So let's just change this from the wages here at the 100,000 and let's put that 100,000 into a schedule C and just look at the different components that are going to be impacted. So this is what we have at the 100,000 W-2 income tax calculated and that's basically what we have thus far. Let's go back into our data input now and say, okay, let's go to the wages and say wages are at zero, deleting the rate wages and then let's go into our schedule C. And so I'm going to say it's a restaurant here for the schedule C data input and we're going to say it's an accounting method of a cash method. This is something you would have to determine are they on a cash or a cruel method if you have inventory involved then you might be required to have like an accrual method at some point in time so that can complicate things, might want to talk to your accountant about that in terms of your accounting method and then I'm just going to go down to the income level. I'm going to put the 100,000, let's put 120,000 in income and that's going to be, this is basically just simply an income statement now and then we're going to have the expenses which I'm going to put 20,000 in the expenses. If I jump back on over to the forms now on page one of the form 1040 you would see what you would expect the net flowing through because that 20,000 that I put in, I believe advertising expenses is now something that was consumed in order to generate revenue and so the net is what's pulling over to page one of the form 1040. Let's follow the flow and see what happens. We've got the news form which is the schedule C. This is what most people will think of when you've got a business like sole proprietorship. Also note that businesses could be set up in other ways when you're talking about business returns and you're going to get questions with regards to the business entity and the type of entity and there's going to be, oftentimes you're going to be dealing with other companies that specialize in setting up certain types of entities like an S corporation or LLC and they have incentives to want to set people up in those areas and you've got to be able to say these are the pros and cons of those kind of entities as well if you start to pick up these types of business returns but the schedule C is the sole proprietorship that we would be picking up. It would be the easiest thing to do if you're a business to start out with and I won't get into the pros and cons of other entities at this point but we've got the 120,000 on the income line up top so first off let's just run through this. We've got the profit and loss, Adam Smith we're going to say it's the restaurant social security number, enter the code from the instructions that's indicating the type of industry that we're in and then you also might have an EIN number and this is going to be important when your schedule C business because you might have to give your EIN number which is an employee identification number even if you don't have employees to someone else so they issue you a 1099 so we might talk about the EIN number in a little bit, a future presentation but then we've got the method that we're going to use we're going to say cash method at this point and then down below we've got the income line item at the 120,000 and then we've got the expenses that are down below which we just put the expense of the 20,000 that gives us the net income of the 100,000 now note that the business income mirrors what you would expect from an income tax system most closely in other words it doesn't make sense if you have your own business for the government to tax you on 120,000 the gross proceeds if you had to spend 20,000 in order to make the 120,000 because if you were to do that it would kind of really wipe out some businesses that have higher expenses in order to generate the revenue so what it makes sense to do is say well we're going to tax you on the net income down here at the 100,000 that means that all these expenses that we're recording on the schedule C are really deductions you can call these expenses deductions it's an income statement on the tax return everything's flipped backwards meaning income is bad for taxes and expenses are good for taxes which is backwards to what it is in like real life but just realize that all these are you're taking these expenses and you're pulling in the 100,000 the net ultimately to page one of the 1040 which is a little bit deceiving because this 100,000 now is in the income line but it's already been net against a bunch of expenses because the whole income statement had already been taken into consideration which had income and the expenses the expenses in essence being business deductions so that's going to be the general now we can get into a lot into the weeds on what's deductible over here and we'll talk more about that but just to get a general idea here we see that this net income flows through to page one of the form I'm sorry schedule one so we got schedule one there's the 100,000 it's coming from the schedule C this totals up to the 100,000 down below that then pulls into the form 1040 so now we're going to go into the 1040 the 100,000 now if that was all that happened you say that's not too bad I can deal with that but we also have some other activity one of the big ones we can see down here that we have the added item of the qualified business income deduction so that's a huge one it's a fairly newer kind of thing that happened a couple years ago the changes to the law and stuff so that's kind of a confusing one we might touch in on that one because it's a big item and then the other one is if I go onto page two we now see that we have the tax calculated but we also have this other thing down here which is the other taxes including self-employment tax like wait a second that's usually what shocks a lot of people and if you're talking to clients that's going to be something that you're going to have to explain to people because if they've been W-2 employees they don't understand self-employment tax and how it ties into the payroll taxes if you were an employee so then you got to basically explain this and this is the thing one big thing that often makes people get behind on their tax payments and even if a business is profitable if they get behind on their tax payments it will discourage their growth process and so you want to make sure that you have that kind of in mind and so that's calculated over here on the Schedule SE so we've got the Schedule SE which is the self-employment tax Schedule SE so in essence if you were to explain this we'll dive into this in more detail later but if you were to explain this to a client or try to think through it yourself so you can explain it to a client you're basically saying hey look the IRS wants to make the sole proprietorship kind of mirror the same kind of activity that's happening in like a normal corporation between the employee and the employer and they're basically treating you as the self-employed person on the Schedule SE as if you are the employee and the employer in other words the wages or the net income that you get at the bottom is kind of similar they're going to treat it kind of similar or in a similar way as being treated and they're treating you as an employee of your own business and the employer of your own business with regards to payroll taxes what that means is on the Schedule SE side of things or I'm sorry on the SE corporation side of things usually what happens with payroll taxes is the employee pays payroll taxes Social Security and Medicare is what we're mainly talking about here and then the employer matches the payroll taxes so you have two sides paying payroll taxes kind of like a 401K plan they kind of sold it that way when they put it into the system it's kind of like a 401K plan or something like that but it's only really with the payments they're kind of mirroring that structure and so they're basically saying okay you've got net income down here we're going to kind of pretend or act like with regards to payroll taxes or self-employment taxes like that's kind of like wages to you and you're the employer so we're going to charge you the employer the employee payroll taxes but we're not going to call them payroll taxes we're going to call them self-employment tax so that's basically what self-employment tax is it's kind of the payroll taxes that they're putting on to the self-employment income on the Schedule SE you're paying both the employer and employee portion in essence so we might dive down into this in a little bit more detail later but in essence you got the 14 129 over to the 1040 page number two 1040 page number two right here and that's a significant as you can see that could be quite significant that could be something that's shocking to people because again they're usually thinking of just calculating the income tax with regards to the tax return if they're not used to the self-employment thing and they're just a W2 employee because if they're a W2 employee they already paid their payroll taxes because they got pulled out of their pay by the employer so they don't really think about it and when you do your income taxes you're not really thinking about the payroll taxes so that's something to keep aware of. Now another thing if I go back on over here and this has to do again with the relationship between a normal corporation and then a sole proprietorship so you're like okay so now you're treating me with my net income as if I'm my own employee and the employer paying the employee and employer portion of payroll taxes but wait a second because if I was a normal corporation I would get to deduct at least a half of the taxes that were the employee taxes so if you're trying to match what I'm doing here on the Schedule C to a corporation I should get to deduct at least half of the payroll taxes because that's kind of how it works in a corporation okay so they're like okay we got to do that but we can't put it in here in the expenses as the payroll deduction for the self-employment half deductible because then you'd end up with a circle reference because that would lower the 100,000 so they then take half of these taxes as you can see here and they charge you the full amount of the taxes that we saw on page two of the form 1040 but then they take half of it and they give you a deduction for income tax purposes not for payroll tax purposes but for income tax purposes so we get a deduction so we're going to say okay where are you going to put that then well that's going to be then on page two of the Schedule I so it's page two of the Schedule I we've got the deduction for part of the self-employment tax which comes from here and then that totals up to all your adjustments and it flows into the 1040 so now we've got the 100,000 here we get to deduct half of the payroll taxes not for self-employment tax purposes but for income tax purposes and then we get to this item here and then they also have and this was another, they gave some benefits to you know the tax rates and so on for business entities and whatnot and then to try to match things up they had to include qualified business income deduction which again it's kind of like a plug in the tax code like to try to reconcile some things that they were trying to do which I think were actually good things but this is kind of an ugly kind of plug thing that they put in there to try to fix everything so now you've got this thing this is a fairly new qualified business income deduction and you can see the calculation here on it which is quite significant and we'll dive basically into that again as well but there's a couple caveats in terms of you know who qualifies and the calculation of it could differ basically on the industry a bit so we might dive into that a bit in future presentations as well so those are some of the things that basically are impacted so you can see that there's just a lot of things that are impacted just from not even just from a bookkeeping standpoint in other words you can also think about diving into the Schedule C and say well does this did they actually get the bookkeeping right where did I get this their Schedule C business and this or did they get this from the software and so on and so forth and you also have then projections out into the future for things like estimate tax payments that they're going to have to make because they're not going to have withholdings that are coming out from their wages from the from the employer that they're going to have to think about and then they can also think about whether something is deductible or not on the expensive side of things what about things like home if you have a home office what's the deductibility of that what about a car if you use the car for work those kind of things get complicated in terms of the deductibility of them same with things like should I have a retirement plan and so on and then of course if you add employees into the role then you've got to deal with the employees that's kind of a bookkeeping side of things but you're also going to have to deal with it when you have the tax when you have the expenses that you're going to have to record if they have employees and then they have the expenses of the payroll that they're running as well so it adds a significant even a basic schedule see adds a significant amount of complexity to the tax return even without considering bookkeeping projections in that kind of stuff going forward so just it's something to be aware of now if I was to mirror this on my tax return over here I'd say I'd say okay we got the hundred thousand is gone let's go to the schedule see and I might mirror the the actual calculation here but I might not always do that for the whole I might not put a whole income statement here in other words if I'm going to do the bookkeeping help them with adjusting entries I'll do a whole another worksheet with it which will be adjusting entry worksheet to help them out with that otherwise I'm going to depend on their numbers maybe and then I'll get to the one hundred thousand there's the one hundred thousand that pulls over to the page one of the of the tax formula so that looks good and then we're going to have to get into the fact that they have the self-employment tax so I'm going to go back on over to the the adjustments and we could get into the calculation of the self-employment tax but I'm going to depend on the software for now to do it but it's a fairly straightforward it's more of a flat tax in other words so if you wanted to actually recalculate it it would be a lot easier to do than the actual federal income tax but I won't do it right now we're going to say we're going to depend on the tax return they came up to fourteen one twenty nine so I'm going to say okay that was fourteen one four one two this is wait a second hold that that's the deductible part this is going to be the additional taxes for self-employment tax additional taxes alternative self-employment okay fourteen now I forgot the number fourteen one two nine one two nine so that pulls over to the first page of our formula down here where we had the tax calculated and then the fourteen one two nine this tax I'll plug in later so we've got that then we've got the deductible part of it which is going to be on the adjustments to income which I could do with a formula I could say this equals the additional taxes for the self-employment tax that divided by two because half of it's going to be an above the line deduction that then pulls into the first page of our formula here so now we've got the one hundred thousand we got the seven thousand sixty five that we get to deduct half of the self-employment tax that brings us to the ninety two nine thirty six we got the standard deduction no change there then we've got this business this qualified business income deduction again we might dive into this in a bit more detail in future presentations right now I'm going to let the software do the calculation for us which is going to be the sixteen seventy seven so sixteen one six oh seven seven and that brings us to the sixty four three oh nine so we got the sixty four three oh nine letting the software do the calculation for the federal income tax of the nine thousand nine hundred so I'm going to say this is going to be the nine nine oh oh and then if I have that and the other taxes which is the self-employment taxes that brings us the twenty four twenty nine so we got the twenty four twenty nine we're not talking about anything on the payments and just remember the payments is a whole different problem than it is if you're a W2 employee because you got nobody helping you out with the withholdings on it you have to actually write a check or make an electronic payment is what they prefer to the government if people do not do that because they're not used to doing that which is very very common then they can easily get behind even if their business is doing good and get discouraged on on their business it's also quite common that people get ten ninety-nines for their income but they don't actually file their tax returns and they don't then write off all their expenses and if that happens then the government's going to come back and say I see your income of one hundred and twenty thousand I don't see any expenses because you didn't file a schedule C they're going to charge you taxes on the gross income and that's where people get really really backed up on the taxes because now they're getting charged on the gross income when they should only be getting charged on the net income and if they don't file the taxes then they can get quite behind in that scenario as well so especially if you're talking to new people that are starting the schedule C type of business to get off on the right foot you want to make sure that they understand the social self-employment tax and the fact that they have to actually make the payments during the year and that they have to do the books especially if they're getting a ten ninety-nine they got to do their taxes because if they don't they're not going to write off their expenses and the iris is going to charge them on gross income which is that's devastating to the business so those are just a quick recap of the things that what we want to keep in mind we'll dive into more of them in more detail as we go