Episode 156: Determining Business Income

On this episode I dig into quarterly taxes and how to calculate them for your business.

If you haven't already, go back and listen to yesterday's episode before diving into today's episode.

The first step is to understand what business income is. According to the IRS, self-employment income is income earned from carrying on a trade or a business as a sole proprietor, contractor, or some form of partnership.

Keeping it simple, if you're doing something that's bringing in money and you're listening to this podcast, you probably have a business.

For tax purposes, freelance/1099 income is the same as business income. Only our self-employment income is subject to self-employment tax (our share of Medicare and social security). This is a 15.3% tax on our net self-employment income (business profit, calculated after business expense deductions).

To be a deduction, the IRS says it must be an ordinary and necessary expense. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful or appropriate in your trade or business.

Some deductions are fully deductible, example - your podcast microphone for recording your podcasts. Some deductions are only partially deducible, example - business lunches.

Grab a copy of the IRS form Schedule-C. You should track your business expenses in the same way the Schedule C does to make it easier to file. You want to avoid having too many expenses in your "Other" category.

You want to maximize your deductions without over-inflating your deductions. Don't buy shit you don't need for your business and claim it as a deduction.

Gross Business Income = all the money we're making in our business.

Gross business profit = Gross Business Income - Cost of goods sold (COGS)

Example: My book costs $15 to print, $7 to deliver (that's a business expense.) My profit is $9

Net income = Gross business income - Total Deductions

Homework: Download the Small Business Deduction Guide Facebook group and read through the guide and understanding your deductions

Calculating the tax. First we have to find our total income, then find our taxable income, then calculate the income tax. We dive deeper into this project in the Unf*ck Your Biz course.

Net business income + all of our other household income = total income For example, if we profit $50k and our spouse makes $50k then our total household is $100k

Total income - adjustments = adjusted gross income (adjustment example - student loan interest)

Adjusted gross income - standard deduction = taxable income

If you are single, your standard deduction is $12,200. If you are married and file a joint return it is $24,400

Then you will calculate your taxes based on your tax brackets. The bracket you fall into does not equal the percentage you're paying on in all your income. You are paying based on each income bracket, not one percentage for all of your income. Combine this with your 15.3% medicare and social security taxes to get your total.

Join the Braden's Bestie's Facebook group to have your questions answered on the podcast.