 Income Tax 2021-2022, Employment Taxes. Get ready to get refunds to the max, dive in to Income Tax 2021-2022. Most of this information can be found in Publication 334, Tax Guide for Small Business 2021. Here is our income tax formula looking at line one, noting that we'll have a separate schedule in essence an income statement with income and expenses, basically being deductions, the net then flowing into the top line of our income tax formula and first page as we see here of the Form 1040, focused in on line number eight, other income from schedule one, the schedule C, bottom line, net income in essence flowing through to the schedule one, which then flows through here to line number eight. This is the schedule C, the profit and loss from business, which is basically an income statement. We're looking at employment taxes and you might be saying, hey, we already went over the self-employment taxes, but that's different, that's self-employment taxes. That's basically kind of like the payroll taxes that are applied to you in essence, the social security and Medicare kind of applied to you, but you also might have employee E. So in other words, if you have a schedule C, you might be the only one working in the schedule C, not dealing with payroll, still be subject then to the self-employment tax on in essence the bottom line of the schedule C, the social security and Medicare, but you also might have employee E's and if you have employee E's, then it's basically like any other kind of business scenario, whether you be a corporation, a partnership or a sole proprietorship, you're gonna have to deal with the payroll taxes related to the employee E's, which is a whole nother topic in and of itself, but the general rule would be payroll is basically a deduction generally on your tax return. If there was no other complication involved, it would be just like any other expense, you'd go shake someone's hand, you'd say, hey, I want you to do A, B and C for a certain amount of money and you pay them that money and then you'd have the business expense related to payroll, but it's not that easy because the payroll then is where the IRS wants the most control over the reporting of the wages that you give to the employee, meaning you gotta track the W-2 information and you have to do the withholdings, which is basically the payroll taxes and then you have your taxes that you have to pay as well with the matching kind of a matching situation. So that means that you're still gonna have to deal with social security and Medicare, but when we're talking about social security and Medicare here, we're not really talking about the social security Medicare charged to you as self-employment tax on your income. This is social security and Medicare that's charged to the employee and in theory, half of it is taken from them, meaning it's paid by them, you then are being the person that is the tax collector. You're required to be the tax collector and not give them the money that's gonna be basically their portion, which is 6.2% currently I believe of social security and 1.45% of the Medicare, you gotta withhold that and then pay it to the government on their behalf. And so that's their payroll taxes, not your payroll taxes, not self-employment taxes, you're just the tax collector, but then you have to pay on top of that the your portion of payroll taxes based on their wages, not based on the net income of the Schedule C, but based on their wages that you paid them and that's what the payroll taxes are, that's social security and Medicare, similar to the self-employment tax, but it's not social security and Medicare on your earnings, it's based on the employee earnings because those are the payroll taxes and you generally get to deduct those on the Schedule C and then the bottom line of the Schedule C is then subject to the self-employment tax, which we talked about in the past. So that would of course be if you have employees they're subject to social security and Medicare taxes, the federal income tax withheld, that means you also have to take withholdings from your employees for the federal income tax, there's no employer portion of that, so that's just strictly a withholding that you need to take based on their W-4 and whatnot, federal unemployment tax, that is another federal tax that is just an employer side, so that's an added payroll tax that we have to pay over and above, we don't take it out or withhold it from the employee, although it's a pretty small tax that has a small cap, little complicated to calculate because of the cap, again payroll is a whole other issue in and of itself from a bookkeeping standpoint, if you're a tax professional, then you might wanna basically, you wanna think about how you're gonna understand that, how deeply are you gonna get into the bookkeeping of it, how deeply are you gonna be verifying kind of the proper reporting of payroll, for example, on the Schedule C, how complex of returns do you want to be dealing with, do you want to be dealing with returns that have Schedule C's, do you want to be dealing with returns that have more complex Schedule C businesses that track things like the inventory and have the payroll and whatnot, or are you looking to do more returns of a more simplified nature, and if you want assistance with some of the bookkeeping side of things, do you have a network to basically help out with other people that wanna do the bookkeeping and or pick up the payroll components possibly so that you could just do the data input and then how can you explain basically the differences between the federal income tax that you pay, the social security and Medicare that you pay in the form of the self-employment tax and the taxes that are payroll taxes if you have employee, which are also social security and Medicare, but not based on your wages, but on the employee wages and how does the withholding process kind of fit into that, so that's confused, this all gets quite confusing to many people and so you wanna be able to explain it to some degree with individuals that are gonna be possibly frustrated if they're small businesses oftentimes trying to get all this stuff straight. So to help you determine whether the people working for you are your employees, you can see publication 5A, Employer Supplemental Tax Guide. So then there's a question of are they an employee or not? So now we're on the sole proprietor side, we asked this question before and we were kind of thinking of it from the standpoint of, am I an employee or am I going to be self-employed? And you can think of situations where it could be kind of a gray area. If you are the self-employed individual and then you're hiring other people, you have that same question with the other people that you're hiring, are these people that I'm hiring, are they employees, are they self-employed? And remember, the IRS wants to pretend like there is no gray area basically. They want to say, well, it's black and white, they're either going to be an employee or self-employed and they kind of have an incentive the government does to try to make people into employees because if they're employees, they have a lot more leverage on you to force you to withhold the money. So that IRS gets their money a lot more easily that way because you are required to as the employer who has much more invested in things to basically hold you accountable if you want to stay in business, right? If they're a contractor, then they have less capacity to make you do the withholdings and whatnot. So in essence, it comes down to the same kind of rules or is this person that you're hiring someone that has their own tools, there's all these rules you can look up on the IRS website, but do they have their own tools or the independent? Are you basically telling them to do a job and giving them a due date and letting them run free or are you controlling every hour that they're working throughout the day? Again, there's gray area in between those extremes, but if the IRS comes back and says, you treated someone as a contractor, which a lot of small businesses would rather do because treating someone as an employee, it's not just the government tries to make it sound like, well, you're cheating the employee or the person working for you by not making them an employee, but it's not always a benefit for someone to be treated as an employee or not. Because again, they could have expenses that they would take as a contractor, although they could be subject to higher self-employment tax. Really the government is trying to make that inference because they want people to be treated as an employee because they have more control in that instance. But if you were to treat someone as a contractor and the government comes back and says they should be an employee, then that could cause problems with regards to the reporting and the payroll taxes and so on. So the publication has information to help you determine whether an individual is an independent contractor or an employee. So you can take a look at that publication 15A if you have that problem. Employment taxes, if you incorrectly classify an employee as an independent contractor, you may be held liable for employment taxes for that worker plus a penalty. So the IRS, again, has the incentive to try, if you're the employer, they're probably going to be leaning towards, it's not like the IRS is coming in. Well, we just want to make sure they're properly categorized. We don't have any interest in which way it goes. No, they kind of have an interest in it. They'd kind of like them to be categorized as an employee generally. So if you have someone as a contractor and you want to be aware that if the IRS was to come in and question you, you have some arguments, legitimate arguments as to why you categorize them as a contractor. So you might want to look up the publication and just kind of list those things out and try to structure, make sure you're structuring your organization so that it's in compliance so you don't get stuck in this problem in that issue. So an independent contractor is someone who is self-employed. You generally do not have to withhold or pay taxes on payments made to an independent contractor.