 Income tax 2022-2023 self-employed. What do you need to know? Let's do some wealth preservation with some tax preparation. Support Accounting Instruction by clicking the link below giving you a free month membership to all of the content on our website broken out by category further broken out by course. Each course then organized in a logical reasonable fashion making it much more easy to find what you need then can be done on a YouTube page. We also include added resources such as Excel practice problems PDF files and more like QuickBooks backup files when applicable. So once again click the link below for a free month membership to our website and all the content on it. 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 on 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 and income statement however it's just an outline just the scaffolding many other schedules and forms flowing into these line items for example with the income line we're focusing in on a schedule C often used for sole proprietorship which in essence is its own income statement having income minus expenses which are basically business deductions the net income of the schedule C flowing into the income line item here of our income tax formula which in essence represents page one of the form 1040 so when we look at the form 1040 we're focused on line eight other income from schedule one meaning the schedule C net income will flow through to the schedule one which will flow through to the first page of the form 1040 here's an example of the schedule C profit or loss from business where we have income minus the expenses the net income in essence the income minus the expenses is what flows through to the schedule one then to the first page of the form 1040 now we're going to go through basically an outline of different topics that we will be looking at as we go through and think about a sole proprietorship that is going to be reported on a schedule C remember that a lot of us there's a lot of different components of the income taxes or the income statement that are affected from a schedule C such as the schedule C the schedule one the self-employment tax we have other deductions that could be impacted and so when we talk about these different items there will often be changes or interrelationships between them so there's not really an easy way that we can just go through one topic to the next topic because they're interrelated in some ways so we will try to lay them out so we can talk about one thing at a time and every time we do so we're gonna have to take a step back and think about the interrelationships between these items as each of them change you've changed man you've changed so what you need to know so table a provides a list of questions you need to answer to help you meet your federal tax obligations after each question is the location in this publication where you will find the related discussion so these are going to be some of the concepts that often come up when people think about reporting their sole proprietor business and we will be touching on many of them and you can also of course go through the publication if you want to jump to more information about any one of them so the following is a list of questions you may need to answer so you can fill out your federal income tax return chapters are given to help you find the related discussion in this publication okay so first question what kind of federal taxes do I have to pay how do I pay them so obviously when we're thinking about the income tax system we have the income tax that we're dealing with but they also kind of sneak in there the Social Security and Medicare taxes which are the self-employment taxes that's the other big one that we have to basically take into consideration oftentimes one often ignored because when we think about a W2 employment situation the employer takes care of the withholdings of Social Security and Medicare and when we think of the form 1040 we don't really think about anything other than the income tax we don't really think about payroll taxes or Social Security and Medicare but when you're doing a sole proprietorship it becomes a big factor so what forms must I file so we're going to go through some of the forms obviously we touched on this in a prior presentation we looked at all the different changes that happen to the tax return when we just add a schedule C right we got the schedule C that's going to be on there and then we also have the self-employment tax we've got the schedule one and so on and so forth worksheets that are going to be included we'll try to touch on those as we go through some of the other options with relation to a sole proprietorship and of course if you want to look at this and jump to these questions in the publication you could see chapter one and the other question what kind of federal taxes that's in chapter one so what must I do if I have employees note that as a sole proprietorship you're saying that you have one owner one one owner generally owns a sole proprietorship there could be an exception if you're a married couple and you're in a community property state and so on and so forth but generally when you're filing a schedule C you've got one owner of the business if you start a hot dog stand you don't incorporate it you just start earning money uncle Sam wants his percent of it you're going to be a sole proprietorship at that point note that when you grow then you have some options you're saying I need help here how am I going to have that help am I going to hire employees am I going to pay contractors or am I going to take on partners and those are some questions that you've got to think about and what are they going to be the consequences of those decisions if you take on a partner then you're not generally a sole proprietorship anymore but a partnership and you're gonna have to file a partnership return from a tax perspective and it also takes on more liability you want to make sure your partnership agreement is worked out well between the partners if you have a contractor you want to make sure that they qualify as a contractor and not as an employee otherwise the iris could get upset and call them an employee and then get gets you in trouble that way you have less control over a contractor but it's an easier system to set up and then payroll if they're an employee then you don't have the situation where they have revenue splitting and you still have control a lot more control and that situation but the iris is going to require other stuff of you such as the reporting of the W2's the withholding of the payroll taxes and all that kind of stuff which is quite burdensome so you want to make sure that you consider that it's also a little bit confusing to think about the difference between paying other employees as a sole proprietorship and the fact that the government kind of treats you as a sole proprietorship as an employee of your own business not because you have to issue yourself a W2 but because the net income that you have from the business is being subject to the equivalent of payroll taxes that being social security and Medicare and the form of self-employment taxes so that kind of confuses what it means to be an employee sometimes when we're thinking about a sole proprietorship we'll talk more about that in chapter one do I have to or you can look it up in chapter one we'll discuss it more as we go through our presentations do I have to start my tax year in January or I can can I start it in any other month now note when you're starting a business oftentimes the calendar years is the default that people think of what their business cycle is going to be obviously for individual tax returns they are typically due by April 15th but sometimes you might want a different year that will be lined up to your natural year when your business cycle ends basically and that could be easier for just logistic purposes oftentimes but because you're a sole proprietorship and you're reporting on a schedule C you might have some limitations in terms of can I have some calendar year that's going to be or a fiscal year for taxes that's different than the calendar year so we'll talk a little bit more about that in chapter two where you can look it up in chapter two we'll probably touch on it in our discussions as well what method can I use to account for my income and expenses so now we're thinking about the method which most methods that come to mind of the two that come to mind usually is a cash-based or a cruel based method oftentimes we think about those methods as completely opposite from each other they're not however because you could have a system that's kind of a hybrid of the two many small businesses for example are going to be in a cash-based system for their expenses because they pay all their expenses with electronic transfers for example and you could sit up that easily but they might be on the cruel basis basically for the revenue because they're in the type of business where they happen to have to invoice the client for work that was done and so then the question is can I can I be in like a hybrid type of method what kind of accounting method maybe there's some method or some accounting trick you could you know you can I use does inventory force me for example to use an accrual method versus a cash based method which is if you have inventory kind of puts a complexity in terms of your decisions on what method to use sometimes this one also gets a little get confusing because when we think about taxes in general we're usually on a cash-based system right when we're thinking about our schedule a items when can I deduct my property taxes or when can I deduct my mortgage interest usually it's when you paid it but on the business side of things normally for large companies an accrual basis is more accurate than a cash-based system oftentimes but we might have the option for a cash-based system which sometimes is easier to account for but it's easier to manipulate a cash-based system as well so so that's the pros and cons we'll dive into that a little bit more later you can see more about it if you want to go to the publication for chapter 2 so what must I do if I disposed of business property during the year now business property we're not talking about inventory if you're selling inventory or services or something that's what happens during the normal course of business but what if I sold a piece of machinery a forklift or something like that business property what then then you've got to deal with the that kind of sale transaction of a fixed asset or something like that and we may look at that later and if you want to jump to that you can look at chapter 3 what kind of business income do I have to report on my tax return so obviously income is basically bad for taxes right so the IRS wants to say that you have to report all income unless there's an exception provided by the IRS so are there any exceptions that we don't have to include an income and then which kind of things do I have to include an income on the Schedule C versus income possibly elsewhere on the tax return are there any benefits to have it reported on the Schedule C versus some somewhere else and so on and so forth you can jump to chapter 5 if you want to read up on that we might discuss that more later what kinds of business expense do I deduct on my tax return this is obviously the big one because we have in essence an income statement for the Schedule C income is bad for taxes expenses business deductions are good for taxes what kind of things can I deduct many of them are going to be straightforward obviously the things that you consumed in order to generate revenue are the things you would naturally expect to be deductible in an income tax type system and the Schedule C makes a lot more sense from that perspective than all the other deductions like Schedule A weird why do I get to deduct mortgage interest I don't know that's what the law says why that's just what the law says why do I get to deduct why do I get to deduct property taxes and stuff these are not business expenses that I needed to expend to generate revenue these are personal expenses so there's personal reasons the government's trying to influence our behavior for whatever reason they want or lobbyists did something or something to change the tax code but the business this when you talk about the Schedule C it actually makes sense that you would tax people on the net income what people had to expend in order to generate the revenue shouldn't be something you know you should not tax people on their gross income you should tax them on the net income so then the question is what kind of those expenses can we include in which can't we include which is a huge topic in and of themselves and we'll go into that in more detail you can jump to chapter eight if you want to dive into that what kinds of expenses are not deductible as business expenses so then of course the inverse what kind of expenses can't I deduct and it obviously personal expenses start to get things you can't deduct it gets messy when things are personal and business what if you traveled for business but the business happened to be at Disneyland or something like that then you've got that's where the muddy situation comes in again we'll talk about that later if you want to jump to it now in the publication which you can find on the IRS website and read up on it you can check that out on chapter eight what happens if I have a business of a business loss can I deduct it now note the IRS is saying hey did you start a hot dog stand did you start a business of any kind I saw you start that hot dog if you made any money remember that we want part of it but obviously if you lost money if you had more expenses than revenue then the iris doesn't want any part of your business right you would think that's their general standpoint they don't they want to they want to take on the the gains that you're going to have they don't want to be responsible for the losses the risk in the business so can you deduct losses well you could deduct them depends it kind of depends right do you have income to deduct them against and then there's certain limitations and so on and so forth the general idea would be that if you have a loss you can understand the objective or the perception of the IRS would be we're skeptical of your losses we want income because we want to take part of your money we don't want to subsidize you for your losses unless you're like a giant like a like a natural natural energy company or something like that then they'll throw money at you like right but again for most people they they don't want to subsidize the losses so losses become messy then so we'll dive into losses more and future presentations you can take a look at chapter nine if you so choose if you do have losses of course don't be afraid to take them as long as it's a legitimate business and then and then you do could get benefits from the losses many small businesses have losses when they first start nothing to be ashamed of but just realize that the iris might be skeptical of losses and taking the losses so you want to make sure you have the evidence for it what are my rights as a taxpayer so we're not going to we may not dive too much into the into this this topic in our presentations but if you want to jump into it more detail chapter 11 on the publication and then where do i go if i need help with with federal tax matters i get you have some more resources that you could take a look at in the publication we might not dive into it so much on the presentations here but if you want to take a look at the publication that's in uh chapter 12