BUSINESS 101 Susan Barney, CPA, SD Barney CPA Focused on Taxes: Your New Favorite Time of Year

the net income from your Schedule C, is a common source of income for those of you that are self-employed. These types of income are called ordinary income. They can be taxed up to the highest tax rate in the tax tables published by the IRS. The other type of income is called capital gain income and is taxed at a lower preferential tax rate, most often 15%. Capital gain income is from the sale of capital assets such as stocks and real estate.

Your total income can be reduced by specific deductions. These deductions are called “above the line” deductions because they reduce your adjusted gross income. The most common above the line deductions benefit the self-employed such as deductions for self-employed health insurance, pension plan contributions (SEP, SIMPLE) and the self-employment tax deduction.

Your adjusted gross income is then reduced by the standard deduction or your itemized deductions, whichever is higher. The amount of the standard deduction is set by Congress and adjusted for inflation. The standard deduction for 2022 is $12,950 for single filers and $25,900 for married couples filing joint. Your itemized deductions include your mortgage interest, property tax payments (limited to $10,000 per year), and charitable contributions.

The next step is to apply the tax rates per the tax table for your filing status to your taxable in- come. The tax rates range from 10% to 37% for ordinary income.

Finally, you offset your tax by the payments that you have made throughout the year. Many people pay their tax by having it withheld from their paychecks. Your employer remits your tax payment each pay period on your behalf. The amount of your federal withholding is reported on your W-2. If you are self-employed, you must make your own payments directly to the IRS by making quarterly estimated tax payments. The tax payments are due April 15, June 15, September 15, and January 15 of the following year. You are expected to pay 25% of your tax each quarter. When you get to the end of the tax formula, you will know if you owe tax with your tax return or if you are due a refund. If your payments are less than your tax, you will owe the remaining balance. If your payments are more than your tax, you will receive a refund. With proper education you can turn tax season dread into excitement and enthusiasm.