How to separate taxes for home and businesses

[mgwinter]

2020 Home and Business:  Both my wife and I have W2's for "home" taxes but we also have separate businesses we file for - I'm never quite clear how to separate what taxes are due from "home/W2's" and how much each separate business owes?  I keep track of the amounts due after first entering all home/W2 info, then when I add each business separately.  But, still confused, hoping someone can assist as my wife and I want to keep our business taxes due directly tied to the individual businesses.  Thanks!

[DMarkM1 · Accepted solution]

The US tax system doesn't work that way.  Individuals (or joint filers) are taxed on the total taxable income and the tax rates are marginal.  The way you are currently working your returns is as close as you will get.

Here is an example.  For joint filers, income from zero to $19,750 is taxed at 10%.  Income between $19750 and $80,250 is taxed at 12%. 

So if a taxpayer first enters 17,000 of W2 income that will be taxed 10%.  Then the taxpayer enters $17K of a business income. The first $2750 is taxed at 10% and the rest at 12%.  Then the tax payer enters $17K for the second business all of that is taxed at 12%. 

But if you change the order of entry the tax on each entity changes.  Also, if taken separately each entity would be taxed at 10%.

Also, if you have capital gains from dividends or selling investments, that income is taxed at different rates as well.  

Perhaps one way to work it is to take each business income separately and determine it's tax based on the tax brackets.  The W2 income will then be the one that is absorbing all the marginal taxes.   

Here is a link with the tax brackets if you need more information.

[VolvoGirl]

What kind of business return do you need to file?  If you are not a corp, partnership or Single Member LLC S corp it is a disregarded entity and you file a Schedule C in your personal tax return.  The taxes are split out.

Self Employment tax (Scheduled SE) is automatically generated if a person has $400 or more of net profit from self-employment.  You pay 15.3% SE tax on 92.35% of your Net Profit (If it is greater than $400).  The 15.3% self employed SE Tax is to pay both the employer part and employee part of Social Security and Medicare.  So you get social security credit for it when you retire.  

The SE tax is already included in your tax due or reduced your refund.  It is on the 1040 Schedule 2 line 4 which goes to 1040 line 23.  The SE tax is in addition to your regular income tax on the net profit.  You do get to take off the 50% ER portion of the SE tax as an adjustment on 1040 Schedule 1 line 14 which flows to 1040 line 10a.  Turbo Tax automatically calculates the SE Tax and Adjustment.

The 50% SE tax deduction only reduces your taxable income and regular income tax.  It will not reduce your schedule C Net Profit or reduce the total self employment tax.  

For 2020  Schedule C Net Profit or Loss goes to 1040 Schedule 1 line 3.  Then the total on schedule 1 line 9 goes to 1040 line 8.

If you also have W2 income, you have to break out the Social Security and Medicare taxes. Only the Social Security part maxes out.  Turbo Tax does it automatically for you.

 Social Security 2020 max is $8,537.40 on $137,700 of wages.

[mgwinter]

Thanks for the reply, the tax bracket approach is making it easier to think about, both of our side businesses would fall in the 10% bracket, so I may just use that number to know how much each business "owes" in taxes to the final count.

[VolvoGirl]

But in addition to the income tax on the Net Profit on Schedule C you will also owe 15.3% self employment tax on them.  It is on the 1040 Schedule 2 line 4 which goes to 1040 line 23.