 Income tax 2023-2024, self-employed health insurance tax software example. Get ready and some coffee, because if you try telling the IRS auditor a joke about taxes, they won't depreciate it. First, a word from our sponsor. Yeah, actually we're sponsoring ourselves on this one, because apparently the merchandisers, they don't want to be seen with us. But that's okay whatever, because our merchandise is better than their stupid stuff anyways. Like our, trust me, I'm an accountant product line. It's paramount that you let people know that you're an accountant, because apparently we're among the only ones equipped with the number crunching skills to answer society's current deep complex and nuanced questions. If you would like a commercial free experience, consider subscribing to our website at accountinginstruction.com or accountinginstruction.thinkific.com. Here we are in our Form 1040 example problem using LASERT tax software. You don't need tax software to follow along, but if you have access to tax software, it's a great tool to run scenarios with. You can also get access to forms, schedules, instructions at the IRS website, irs.gov, irs.gov, starting with our normal starting point. Our taxpayer Adam Taxman, just trying to avoid a dang taxman living in Beverly Hills 90210. Single file to start off with, we have no dependence at the beginning. We've got our W-2 income at the 100,000. We then have the standard deduction $13,850, getting to the taxable income $86,150, which we can mirror in our income tax equation in Excel 100,000. $13,850, getting us to the $86,150, the tax calculated at $14,266. On page 2 we can see that of our Form 1040, $14,266. Alright, let's go back to page 1, scrolling down. We're looking at the Adjustments to Income line number 10, which pulls in from the Schedule 1. If we go to the Schedule 1, that's not the Schedule 1. There it is, Additional Income and Adjustments to Income. We want page number 2, which will have part 2, the Adjustments to Income. And we are now looking at the Self-Employed Health Insurance deduction. So as the name indicates, of course, that would possibly be applicable if somebody is self-employed. Most of the times we think about self-employed as someone who has a Schedule C type of business, but they could also have some other form of self-employment income, possibly with a flow-through entity like a partnership, for example, or possibly like an S corporation could be applicable as well. Now with the health insurance, this is another area that's always been a little bit confusing because if you look at the historical background of health insurance, it's typically tied to someone's place of employment. It used to be that people worked for the same place for a long period of time, which was the vast majority of people, a lot of people, that was their work experience. And they got a benefit from their employer by being able to purchase the health insurance from the employer, which at the least usually was able to get the group insurance plans, which might be cheaper than if you bought it yourself. And that's how or one way that the health insurance kind of got linked to employment. These days it becomes much more complex because you have multiple people working in families. So whose health insurance should you be taking? Jobs are being switched on and off and whatnot. And people might be doing their own stuff as well. And so the health insurance became more complex. And of course the question comes up for sole proprietors of, well, shouldn't we get some kind of benefit as well if we're self-employed with regards to health insurance and so on. So that means that if you have a Schedule C business, there's a couple scenarios where someone might have self-employment. One would be, well, they have access to a Schedule C or they have self-employment income, but they also have W-2 income, either themselves or possibly their spouse, for example. In that case, you might still, even though you have self-employment income, be able to have access to health insurance through the employer, which is kind of like the default design of the system, right? So they're going to say, in that case, then you might be able to do your health insurance through your employer just as you would before, but you also have some self-employment income. What if you don't have any W-2 income and or you don't have access through your job to health insurance because it's not provided by your employer or something like that? Well, in that case, then that's when this could apply, right? So you get the deduction on the Schedule C. So let's see what that looks like. So let's go back on over here. I'm going to say, okay, if you had a W-2 employee, if the health insurance was taking place through the place of employment, then the employer would generally, you reflect the impact of the health insurance on the W-2 form. If there's any impact on line one for federal income tax purposes, they would make the adjustment as well as social security income and basically Medicare income. So the compensation should be reflected by the W-2 constructed by the employer. But obviously, if you do it yourself, then we're going to have to deal with the taxes on the Schedule C, not only the federal income taxes, but the impact for the social security and Medicare. So that's going to complicate the situation a little. So I'm going to delete the W-2 income and let's go to a Schedule C. So let's add a Schedule C and let's put the same amount of general income. So we're going to go back to our $120,000 and then we're going to say that the expenses for advertising are $20,000. That will then give us 100,000 of income that's coming through on the Schedule C. So now we have a Schedule C here. And so here's our income statement, the 120 minus the 20 gets us to the 100,000. And so now the question is, could I deduct the health insurance? Okay, so if you don't have access to other health insurance, and this would be the general question, if yourself you're doing Schedule C for your own business or if you're working in taxation, a common question would come up if you see self-employment income is, well, do they have access to health insurance through W-2 insurance or something like that? And if not, then is it possible to get a deduction for the health insurance through the self-employed income? If they can, then you would think you would deduct it on the Schedule C, but no, we're going to be putting it over on the Schedule 1. Now again, you might ask, why would that be the case? Why would it be on the Schedule 1? Well, notice what happens here. If I was to deduct it here on the Schedule C, it would lower this 100,000, which would pull into the first page of the Form 1040, which would be applying the federal income tax, which would basically be correct, that's what we're mainly thinking of, but it would also pull into the self-employment. So self-employment tax, which is the Social Security and Medicare. So it would also have an impact on this worksheet, and so if we take it off of the Schedule C and put it somewhere else, such as the Schedule 1, then it will still lower the federal income taxes, but it will not have an impact on the Social Security calculation. So I would think that that is kind of the rationale here, right? So that means we have to put it off Schedule C on the Schedule 1, page number 2, and you can see now we still have the SEP that came into place. Let's take the SEP off just to make it easier. That was from a prior presentation. Let's remove that so we could focus on one thing at a time. So we've got half of the self-employment tax that is here, and now you might say, okay, now you have the self-employed health insurance, and so this would be something that you have to make sure doesn't kind of slip through the cracks if you find someone who's self-employed or if you are self-employed because it's not really on the Schedule C, it's not really a business expense, and like I say, the default position would be to take the self-employment through an employer if you have the capacity to do that. So anyways, the premium is not entered elsewhere, so I'm just going to put $6,000 there. So now we've got the self-employed health insurance that's being added in, and we can go to the Form 1040. So again, you can see the Form 1040 is significantly more complex even though we have the same kind of $100,000. Why? Because now we've got the $100,000, we've got then the adjustments to income, which are $1365, even though I only added $6,000 to the health insurance. Why is that the case? Because we have the Schedule C here at the $100,000, and then that rolled in also to the self-employment tax, which was the $14129 that we have to calculate social security and Medicare. That's on page, that's on the 1040 page number two. So we have the income tax and this $14129, and we get half of that as a deduction, which is on the Schedule I page two. So that's where this number came into play, $7,065, and then here's our $6,000 adding those two up. That gets us to the $1365, which is going into the Form 1040. So there's our $1365, and then we have the adjusted gross income, and then we have the standard deduction, which was the same, and then you've got this qualified income deduction, Form 8995, which I don't want to dive into in detail here, and that's going to give you the 58468 page number two, calculating the tax, not only the federal income tax, but also the social security tax. So just another note that with self-employed individuals, if they just have gig work or something like that and they also have other job, then their bookkeeping will probably not be too detailed and they might not have a whole lot of extra planning that would go into play, such as can they deduct their health insurance because it's on the side. But when you start getting into that being their primary business, then it starts to get more complex with the tax planning strategies where you have things like benefits that would normally go through an employer, as we saw before, like retirement plans and now like health insurance kind of situations that get more into the world of planning rather than just straight income tax preparation. As a tax professional, your question is going to be, which clients do I want to be taken on? Where do I want to be focusing my time? I'm always going to kind of go back to that idea. Now also note, if you're in a low-income situation, we know that there's what you might refer to as like the Obamacare or a credit for health insurance. We'll talk more about that when we get to the credits, but just realize that if you have a credit for health insurance situation, then that's going to complicate how much you paid for health insurance, right? So to see how much you're going to be able to deduct for the health insurance. So just note on lower-income individuals that are dealing with an insurance for health insurance to help pay for the premiums, that could complicate as well the calculation for how much you can be able to deduct here in and above the line deduction. Let's do a quick recap of this over here in our worksheet. Just to mirror this, we'll say our income, we said was 120,000, and then we said 20,000 of expenses, 100,000, pulling in to the first page of the 1040. I'm going to remove the W-2 income. Now we have the 100,000 that's pulling in here. Then we're going to also have other taxes that will be calculated. I'll let Lassert calculate it even though I could get more detailed and estimated. Lassert's calculating the other taxes at 14129. So I'm going to put that here, 14129. I'm going to say that's 14%, which seems about right because if I was to take a look at the percentages between the employer and employee portions, that seems kind of like around that wheelhouse. So if I go back on over, that's calculating down here now. And then I want to go into the adjustments to income. So the adjustments to income are now pulling in this number automatically because it's half of the tax that I just calculated. So we have that pulling in. And then we also have the health insurance. So let's add a new line and call it self. Is this what it's called here? What did I call it? Yeah, let's just call it self-employed health insurance. Okay, I don't think I spelled that right. Did I spell that right? I doubt it. I doubt it. Idiot. Account. I'm not an idiot. Armed forces. Armed forces. Oh, I did spell that right. I spelled other stuff wrong, but it seems like that's the spell check didn't give me a thing. Okay, so whatever. It's just for internal purposes only. Anyways, it's not even a big deal. It's not even big deal. Why are you making a big deal out of it, man? And so this is going to be 6,000. And then let's add this in. So that's going to be the 1365, which is pulling into the first page. So there's our 100,000 1365 above the line deductions. Gets us to the 86936. So let's check that out. This is not where I want to be. So we're at the 86936 13850 for the standard deduction. And then I'm just going to let the software calculate this 14617. So we'll say qualified. This is 14617. We'll possibly talk more about that later when we get to the schedule C. And then we have the taxable income at the 58468. So there's the 58468. And then page two calculated the tax at 8172. So here's the tax at 8172. And then we have the other taxes at the 14129, Social Security and Medicare in this case, bringing the tax to 22301, 22301. So that's the general idea. So the idea for the health insurance would basically be, do they have self-employment income? If they do, do they have other income? Is it just a side job? If it's other income, then you're going to ask about their health insurance. If they have health insurance through their W2 job, even though they have self-employment income, then you might not have any kind of deduction for the above-the-line or adjustment to income of self-employment. But if the self-employment income is their main source of income, it's likely that they don't have access to other types of health insurance and therefore might be paying for health insurance as part of their self-employment business, in which case they might get a deduction for the self-employment, and you have to kind of make sure to pick that up and then know that it's not going to go on the schedule C because of the rationale between the types of taxes that are going to be applicable to it and which are not because it's kind of like a personal expense. Self-employment is basically personal for your personal medical, but the IRS still wants to deduct it, right? But not for some taxes, but for others, for federal income tax, but not for Social Security Medicare. Therefore it's not on the schedule C, but on the schedule 1.