 Most of this information comes from the Tax Guide for Small Business for Individuals Who Use Schedule C Publication 334 Tax Year 2022. You can find at the IRS website, irs.gov, irs.gov. Looking at the income tax formula, we're focused on line one, that being income. Remember, in the first half of the income tax formula is in essence an income statement, although it's just the scaffolding, just the outline, meaning other forms and schedules will be feeding into it. For example, the Schedule C, our point of major focus here, will feed into line one, that being income. The Schedule C, basically being an income statement in and of itself with income minus expenses, basically business deductions, the net income flowing here to line one of the income tax formula. This is the first page of the Form 1040. We're focused on line number eight, which would have been populated from the Schedule C that flowed through to the Schedule 1, that flowed through the first page of the 1040 and line eight. This is the Schedule C profit or loss from business, basically an income statement, income minus expenses. We're now focused on the self-employment or SE tax. SE or self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. You might be asking, hey look, I thought we were dealing with the Form 1040 and the federal income tax, what's this self-employment tax business? Let's take a step back and think about where we typically think of social security and Medicare taxes, that being as withholdings in a W-2 type of situation, because the self-employment tax is basically mirrored off of that type of scenario. If you were an employee working for an employer, we would call those payroll taxes. The payroll taxes, the amount that's withheld from your paycheck as a W-2 employee, include the federal income tax, which we do deal with on the Form 1040, but also the social security and Medicare taxes. We see those on the Form W-2, but we often don't have to deal with them on the Form 1040 unless there's a problem because they've already been taken care of by our employer and the W-2 is kind of just an information form. For us, we're going to use that W-2 primarily in that case to report the federal income tax and the overpayment of it, hopefully, to get a refund from it. The way the social security and Medicare is set up is that if you had employee-employer situation, you would be paying half of it that would be taken directly out of your paycheck and the employer would also be paying half of it. So you have an employee and an employer half. Now, if you're self-employed, the IRS would like to say, no, we don't want you to get away with not having to pay the social security and Medicare, because now you don't have the payroll taxes and you're not giving yourself a W-2. They would most likely frame it this way. We want you to be able to participate in paying into the social security system so that you can get benefits in retirement age. But obviously, if you can not participate and keep your money and pay for your own retirement, you probably would be better off. But in any case, the IRS wants you to be paying into the social security, social security card and Medicare system. So they are, in essence, going to take your Schedule C, look at the net income on that Schedule C, and then charge you the equivalent of payroll taxes and, in essence, both the employee and employer portion. So you're paying a larger amount of payroll taxes as a sole proprietorship business than you were if you were an employee. Because in an employee situation, you would only be paying the employee half. The employer would be paying the other half. So that's kind of one of the downsides of being a sole proprietor, contractor, you having your own business versus being an employee. However, on the plus side, you get the deductions. So you might be able to have deductions lowering the amount of income, which would lower the amount of self-employment tax. So that's the general overview that we're trying to kind of keep in mind. That means that we have to kind of report this and add that tax to the reporting on our form 1040, something we're not used to doing if we normally had or prior had a W2 type of situation. Okay, it is similar to the so-called social security Medicare taxes withheld from the pay of other wage earners. So caution, if you earn income as a statutory employee, you do not pay SE self-employment tax on that income. Social security and Medicare tax should have already been withheld from those wages. Social security coverage. Now note, when you're thinking about what type of income something is, this becomes important because now the question is, is the income that you have subject to self-employment tax? So obviously, if you're had a W2 employee, that income from the W2 is not subject to self-employment tax because you already paid, in essence, your portion of the equivalent of payroll taxes. If you have self-employment business, then you're reporting on a Schedule C. That's the primary example of something that would be subject to self-employment tax. If you've got other kinds of income like hobby income or something like that, then you may not be subject to the self-employment tax. That's a big deal because the self-employment tax can be substantial. Social security coverage. Social security benefits are available to self-employed persons just as they are to wage earners. Notice what the IRS focus is in on here. I just want to point out the perspective when you're talking with the IRS because obviously, they're going to come from the perspective that all this stuff is just for your own benefit. They're forcing you to pay into the social security system so that you can get the benefits. It's a good thing for you. In reality, again, I think most people would opt not to be paying into the social security system and say for their own retirement, if they were given the option, especially if their business was making money and given the fact that the social security system is clearly going to have a problem at some point down the road because it's basically underwater as we speak. It's just interesting to look at the framing of it. You've already got to see that it doesn't mean that information is wrong but it's useful to look at the framing from the people that are giving you the information. So your payments of social security tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital assurance Medicare benefits. So as you're putting money, when we think about social security, there's two sides of it that we think about. One is the tax side when we're paying into the system and the other side is the benefits side when we're in retirement and we're going to be paid out of the system. Note that social security and Medicare were actually put in place like during the Great Depression in the 30s and because there's this big problem that was happening and of course at that time and they were just entering laws like crazy, most of which were probably detrimental extending the depression but some of which you know stuck but the idea of the social security and the Medicare at that time was more that it was a safety net program meaning if people lost their savings for whatever reason that was like outside of their control or they lived past their life expectancy because they're living longer and they don't have the money to pay for their retirement then we want a safety net to help those people right but then it grew to the point where now social security we think of them as a country more like it's a it's a retirement program that's government based meaning everybody puts a substantial amount of money into social security and expects to get payments not as a safety net program not for those that need it but for everyone so that's a whole different kind of model that we're thinking about it's kind of a weird change and it's kind of interesting if we're going to go complete towards that change or not is that good should it be a safety net or should it be more of like a universal retirement plan for federally funded it's kind of weird