 Income tax 2021-2022, self-employment tax, SE tax. Get ready to get refunds to the max, dive it into income tax 2021-2022. Most of this information can be found in publication 334, tax guide for small business on the IRS website, irs.gov, irs.gov. Looking at the income tax formula, top line of it, noting that this will have a supplemental schedule in essence being an income statement, income and expenses, the expenses basically being deductions, the net then flowing through to line one, the income line and to the first page of the 1040, ultimately going into line number eight, going from the schedule C to the schedule one, then here to the first page of the 1040, line number eight. This is going to be the schedule C, profit and loss, basically an income statement. The bottom line of this schedule C will be subject that's kind of like the net income to self-employment tax. So this is going to be the schedule SE, which is the self-employment tax. Now in general, it's useful to think about the self-employment tax is kind of the equivalent of payroll taxes for a self-employed individual. And when we're talking about the self-employed individual, you might be saying, hey, if I have a schedule C, I might still have employee E's on the schedule C where I deal with payroll taxes in that sense as the employer and have to deal with the employer portion of the payroll taxes and the employee E portion of the payroll taxes. That's not what we're talking about here. We're talking about the bottom line of the schedule C basically being the net income of the schedule C and the government in essence thinking of you as the employee E of your own business as well as the employer of your own business and therefore subjecting you for that net income amount to basically kind of like payroll taxes on both the employee E and employer side which is going to be called the self-employment tax which is going to be the Medicare and the social security taxes. So this will be a significant tax and it's something that is going to be in addition to the federal income tax and something that often causes confusion especially to people that go from a W-2 system where they're getting withholdings for all the taxes but also with the social security and Medicare with regards to payroll taxes and they've never had to kind of deal with that when they file their form 1040 it's just like an informational type of thing and then they move over to say self-employed and then they have to actually calculate and pay the equivalent of those payroll taxes on in essence the net income bottom line of the schedule C and pay both the employer and employee portion which again can be quite significant. It's also important to note that it's a separate tax calculation from the federal income tax because when you talk about deductions then you have to think about is this something that's going to be a deduction for the federal income tax purposes or is it going to be a deduction for the self-employment tax or both because the self-employment tax is usually going to be a more simplified kind of calculation just taking that bottom line and using more of a flat tax kind of system to do the calculation although there's a cap on it for the social security portion of it. So that's just the general overview that we want to keep in mind with self-employment taxes. Make sure to take that into consideration when you're talking to people about the business and their sole proprietorship. So self-employment tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. And we talked about the idea that if you had a situation where you could be either self-employed, reporting on a schedule C or an employee which would be better? And the answer of course is well it depends because if you're self-employed you might get a bunch of deductions that you couldn't take if you're a W-2 employee because the assumption would be that as an employee those deductions or those expenses would be given to you by your employer so they're not generally allowed if you're a sole proprietorship then you might be able to take them because the assumption would be that you'd have to provide more of your own kind of resources in that instance. However on the downside whatever net income that you have is gonna be subject to both the employee and employer portion of the self-employment tax. Whereas if you are an employee you're only subject you're only getting a withholding from your wages the your portion the employee portion so there's a significant difference there in terms of whether you're an employee or the self-employment tax as a sole proprietorship. If you earned income as a statutory employee you do not pay SE self-employment tax on that income social security and Medicare tax should already have been withheld from those earnings that's a little bit more of an unusual situation but you might see that as a statutory employee. Social security coverage social security benefits are available to self-employed persons just as they are to wage earners. So the social security is gonna be something that we don't know really in the United States if it's gonna be a benefit program or if it's like a retirement kind of program for everybody because the tax is quite significant to it and then the benefit calculation is kind of calculated on who put the most money in but it's also phased out substantially as the income goes up as you put more money in as your income is higher. So that means that if we're thinking about it more of like a retirement program you put all this money in you should be getting a benefit from it in retirement then you wanna be able to basically if you're paying it in have it added to the calculation that will be then calculating how much money you're gonna get back out at the point of retirement the more money you put in the higher your benefits should be when the money's coming back out. So to even everything out from an employee-employer situation and a self-employed situation they're gonna subject the sole proprietor to paying in the payroll taxes in the form of self-employment taxes but also getting the benefits on the social security side to hopefully get benefit payments paid back out at the later years. So your payment of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability part of SE tax, Medicare tax and Medicare part of railroad retirement tax. If wages and tips you receive as an employee are subject to either social security tax or the tier one part of railroad retirement tax or both the total at least 142.8 you did not pay the 12.4 social security part of the SE tax on any of your earnings. So here's where it gets a little confusing because the social security has a cap on it and the reason it has a cap on it meaning if your income goes above 142,800 income subject to social security then you no longer pay the social security tax above that level. And the first thought most people have when they hear that is like well why would that be? Because now you're given a benefit to people that make more money over a certain threshold and the reason for that is again because we're not really sure whether the social security is a safety net or like a kind of a retirement program and basically you're getting a benefit if you put more money into the program and it was a retirement program then it should go into the calculation for you to get the money in retirement. You're paying all this money in it's a substantial tax you should be getting the benefit from that in the calculation to get the money back but after a certain threshold you're not getting any more benefit even though you're putting a lot of money into it at that point in time and again the calculation on how much you're gonna get back in benefits at retirement age is already phased down as your income goes up and then if it goes over a certain threshold you're not getting any more benefit even though you're paying a substantial amount in that's why there's a cap on it basically. So a lot of arguments over how high should the cap be should there be a cap and whatnot but that's the rationale for it. So now that there's a cap the problem is well if I only have one source of income like one Schedule C business on my return then I can determine if I go over the cap then I cap it off no problem the tax software can figure that out and that's not a problem but if I have W2 income and a Schedule C now you can see you kind of run into problems because the W2 income I'm paying into to the tax system as well and then I'm also paying in on the self-employment side so the cap is gonna be more difficult to apply how do I apply the cap out and that's where the confusion comes into play because you still shouldn't be paying in your combined income subject to social security more than the cap of the 142.8 and if you do then you might have some tax consequences to adjust for the fact that you overpaid the social security. Okay so however you must pay the 2.9% Medicare part of the SE tax on all your net earnings so the other part of the self-employment tax and the payroll taxes is the Medicare part and it doesn't have a cap on it so that means no matter how your income goes you're gonna pay into it which that one is a much smaller tax and it's pretty clearly more like a safety net program and not like a retirement benefit program so that would make a little bit more sense so additional Medicare tax, a 0.9% additional Medicare tax may apply to you if your net earnings from self-employment exceed one of the following threshold amounts so the social security actually caps off and you don't pay any more after the cap the Medicare tax actually goes up by this 0.9% and that's if married filing jointly you go over the 250,000 this would be like normal progressive tax system calculations which again would make sense because this tax is not a benefit program for you it's a safety net program so the more money that you make the higher you put into the safety net program generally and so they have this tear up or level up married filing separately the 125,000 and if you're single head of household or a qualified widow's widow were 200,000 if you have both wages and self-employment income the threshold amounts for applying the additional Medicare tax on self-employment income is reduced but not below zero by amount of wages subject to the additional tax so then again you got this kind of issue with okay well what if I'm also subject to W2 income which I'm paying payroll taxes on which is basically the same thing as the self-employment tax with this added amount and it gets confusing so use form 8959 additional medical tax to figure this again software of course often helps with these calculations and then you can kind of reverse engineer use the instructions to software and then back your way into and help out to basically explain what is going on so which forms must I file so if you are liable for income tax then of course you've got the 1040, 1040 SR and then at the due days the 15th of the fourth month after April 15th April 18th in our case self-employment tax so if it's self-employment that's going to be the schedule SE so if you have a schedule C on your income statement then you also have the schedule SE you file it with the form 1040 of course estimated tax that's going to be the 1040 ES if you have a schedule C you need to make your estimated taxes because you got to make them during the year and so that means you got to make these estimated tax payments generally unless you have also W2 income and you can do withholdings social security Medicare taxes and income tax withheld these are kind of like the equivalent of the schedule SE, the self-employment tax but in an employee-employer situation so if you were a sole proprietorship schedule C and you had employee ES then you would be filing form 941 and 940 or 941 is generally quarterly or 944 depending on your level and those would be calculating the payroll taxes but those would be based on the employee's earnings the employee's earnings as opposed to the net income of the business which is subject to the self-employment tax which is basically your kind of your earnings of the business that's subject to taxation so then we've got the providing information to social security and Medicare taxes and income tax withholding so if you had employee ES you've got to report the W2 or if you were an employee you get the W2 that reports not only the federal income tax which is the main thing we mainly think about but also the withholdings which is social security and Medicare the reason we don't typically think about them is because they're flat taxes they've already been taken care of they've already been paid it's just an informational thing to report doesn't really impact the 1040 calculation unless there's like some cap problem that hit with the social security or something like that that's why when people move from a W2 situation to a schedule C they're shocked about the self-employment tax that comes about because they're not they haven't really thought about that when they file their 1040 federal unemployment tax that's gonna be another tax on the employer side of things so that would be a payroll type of tax reported on the form 940 which you would only be dealing with if you had employees if you were sole proprietorship and had employees dealing with payroll taxes for your employees filing information returns for payments to non-employee and transactions with other persons so you might have other transactional forms possibly like a 1099 for example and then the excise tax so you might be subject to the excise tax we might talk a little bit about that in future presentations as well.