Tax 8-7 Analyze a situation to calculate the self-employment tax. Flashcards
Self Employment Tax
Identify the types of income that give rise to the self-employment tax.
(LO 8-7)
a. Self-employment income,
b. Schedule C net income,
c. Distributive share of partnership net income,
d. Flow-through of LLC income to the managing member,
e. Schedule F farm income,
f. Net income from rental of personalty (but not realty)
Self Employment Tax
John Blake has Schedule C net income of $55,000 for 2016. He also reports $27,000 as his share of income from an S corporation.
Calculate the self-employment tax that John must pay.
(LO 8-7)
The self-employment tax liability is $7,771.
Self Employment Tax Below Wage Base
$55,000 Self-employment income - 7.65% = $50,793 Net earnings from self employment * 15.30% = $7,771.25 Self-employment tax
$27,000 as his share of income from an S corporation is not included
Self Employment Tax
John Blake has Schedule C net income of $55,000 for 2016. He also reports $27,000 as his share of income from an S corporation.
Compute the adjustment to income for a portion of the self-employment tax if his self employment tax is $7,771
(LO 8-7)
The adjustment to income is one-half of the self-employment tax, or $3,886.
Self Employment Tax
Module Check
- Sam Smith has the following items of income:
Sole Proprietorship income = $40,000
General Partnership Income = $5,000
Interest Income = $1,200
What is the amount of self-employment tax Sam owes? Round your answer to the nearest dollar.
- $6,358
- $6,529
- $6,885
- $7,069
(LO 8-7)
- $6,358
Below wage base
$45,000 self-employment income - 7.65% = $41,557.50 Net earnings from self employment * 15.3% = $6,358 Self employment tax
Interest Income is not subject to self employment tax.
Self Employment Tax
Module Check
- Which one of the following statements is true with regard to self-employment taxes?
- A taxpayer is allowed to deduct one-half of his or her self-employment tax liability as an adjustment to income.
- The wage base is not adjusted annually for cost of living increases.
- Net earnings from self-employment must be calculated under the accrual method of accounting.
- Self-employed taxpayers are subject to employer withholding.
(LO 8-7)
- A taxpayer is allowed to deduct one-half of his or her self-employment tax liability as an adjustment to income.
A taxpayer may deduct one-half of his or her self-employment tax liability as an “above the line” adjustment to income.
Self Employment Tax
Module Check
- Frank Pepper, a single taxpayer, has a flow-through of net income from a general partnership of $180,000 for 2016. He also has a flow-through of $12,000 of interest and dividends from an investment partnership. What is the amount of self-employment tax that Frank must pay?
$19,514.67
$19,836.05
$19,914.00
$29,376.00
(LO 8-7)
$19,514.67
Over wage base
$180,000 Self employment income - 7.65% = $166,230 Net earnings from self employment - $118,500 Wage Base = $47,730 * 2.9% = $1,384.17 \+ $18,131 (15.3% of $118,500) = $19,514.67 Self employment tax
Self Employment Tax
Module Check
- Michelle Linvale has a flow-through of net income from a general partnership of $160,000 for 2016. What is the amount of her self-employment tax? Round your answer to the nearest dollar.
$18,131
$18,980
$19,334
(LO 8-7)
$18,980
Over wage base
$160,000 Self employment income - 7.65% = $147,760 Net earnings from self employment - $118,500 Wage Base = $29,260 * 2.9% Medicare Rate = $849 \+ $18,131 (15.3% of $118,500) = $18,980 Self employment tax
Self Employment Tax
- Sam Smith has the following items of income.
45,000 (Self employment income)
4,000 (Interest Income)
12,000 (Gain on the sale of a Capital asset)
What is the amount of self-employment tax Sam owes? Round your answer to the nearest dollar.
(LO 8-7)
Below wage base
45,000 (Self employment income) - 7.65% = 41,557.50 * 15.3 = 6,358.30 self employment tax
Neither the interest income nor the capital gain is subject to the self-employment tax.
Self Employment Tax
What is the self employment tax on $30,000 of income? (i.e less than SS wage base)
(LO 8-7)
Below wage base
$30,000 Income - 7.65% = $27,705 Net earnings from self employment * 15.3% = $4,238.87 Self employment tax
Practice Test 2
Self Employment Tax
- Lowell Benson has Schedule C net income of $55,000 for the current year. In addition, he has a flow-through of interest and dividends of $27,000 from an investment partnership.
What is Lowell’s self-employment tax for 2016? Round your answer to the nearest dollar.
$6,755
$7,771
$8,415
$11,586
(LO 8–7)
$7,771
Below wage base
$55,000 actual earnings - 7.65% = $50, 792.50 net earnings * 15.3% = $7,771.25 self employment tax
The flow-through of interest and dividends is not subject to the self-employment tax. (Answers may vary slightly due to rounding.)
Practice Test 2
Self Employment Tax
- Blake Howard had $130,000 of self-employment income and $25,000 in distributive share income from an S corporation.
What is Blake’s self-employment tax for 2016? Round your answer to the nearest dollar.
$18,176
$18,464
$18,845
$23,715
(LO 8–7)
$18,176
Above wage base
$130,000 Self employment income - 7.65% = $120,055 Net earnings from self employment - $118,500 Wage Base = $1,555 * 2.9% = $45.10 \+ $18,131 (15.3% of $118,500) = $18,175.60 Self employment tax
- Which of the following types of income are subject to the self-employment tax?
I. net income from a real estate rental
II. investment income from a general partnership
III. net income from a sole proprietorship
IV. flow-through of income from an S corporation
III only
I and III only
II and III only
I, II, III, and IV
(LO 8–7)
III only
Options I, II, and IV are specifically excluded from the self-employment tax. The net income from a sole proprietorship is definitely self-employment income.
