CSLB Law & Business ExamBusiness FinancesHard
A sole proprietor contractor has $80,000 in net self-employment earnings for the year. Self-employment tax is calculated at 15.3% of 92.35% of net earnings. Approximately how much self-employment tax is owed?
- A$11,304
- B$13,872
- C$12,240
- D$9,180
Show answer & explanationAnswer & explanation
Correct answer: A. $11,304
Taxable base = $80,000 × 92.35% = $73,880. Self-employment tax = $73,880 × 15.3% ≈ $11,304. The 92.35% factor adjusts earnings before applying the combined Social Security and Medicare rate.
Why the other options are wrong
- B. This overstates the tax by using a base higher than the actual net earnings.
- C. This applies 15.3% directly to the full $80,000, skipping the 92.35% adjustment.
- D. This applies 15.3% to too low a base, understating the correct tax owed.
Self-Employment Tax
A federal tax covering Social Security and Medicare contributions for self-employed individuals, calculated at 15.3% of 92.35% of net earnings.
- 15.3% combines 12.4% Social Security and 2.9% Medicare
- Applied to 92.35% of net self-employment earnings, not the full amount
- Half of SE tax is generally deductible on the contractor's income tax return
Memory trick: 92.35 then 15.3 — two steps before the self-employment tax bill arrives.