Tax 8-7 Analyze a situation to calculate the self-employment tax. Flashcards Preview

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Flashcards in Tax 8-7 Analyze a situation to calculate the self-employment tax. Deck (12)
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1
Q

Self Employment Tax

Identify the types of income that give rise to the self-employment tax.

(LO 8-7)

A

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)

2
Q

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)

A

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

3
Q

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)

A

The adjustment to income is one-half of the self-employment tax, or $3,886.

4
Q

Self Employment Tax

Module Check

  1. 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.

  1. $6,358
  2. $6,529
  3. $6,885
  4. $7,069

(LO 8-7)

A
  1. $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.

5
Q

Self Employment Tax

Module Check

  1. Which one of the following statements is true with regard to self-employment taxes?
  2. A taxpayer is allowed to deduct one-half of his or her self-employment tax liability as an adjustment to income.
  3. The wage base is not adjusted annually for cost of living increases.
  4. Net earnings from self-employment must be calculated under the accrual method of accounting.
  5. Self-employed taxpayers are subject to employer withholding.

(LO 8-7)

A
  1. 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.

6
Q

Self Employment Tax

Module Check

  1. 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)

A

$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
7
Q

Self Employment Tax

Module Check

  1. 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)

A

$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
8
Q

Self Employment Tax

  1. 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)

A

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.

9
Q

Self Employment Tax

What is the self employment tax on $30,000 of income? (i.e less than SS wage base)

(LO 8-7)

A

Below wage base

  $30,000 Income
- 7.65%
= $27,705 Net earnings from self employment
* 15.3%
= $4,238.87 Self employment tax
10
Q

Practice Test 2

Self Employment Tax

  1. 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)

A

$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.)

11
Q

Practice Test 2

Self Employment Tax

  1. 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)

A

$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
12
Q
  1. 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)

A

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.

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