CPA Exam — REG (Regulation)Federal Taxation of IndividualsHard
A client operates a sole proprietorship. For the current tax year, their net earnings from self-employment are $80,000. What is the amount of their deductible self-employment tax?
- A$0
- B$5,652
- C$11,304
- D$6,120
Show answer & explanationAnswer & explanation
Correct answer: B. $5,652
Self-employment tax is 15.3% (12.4% for Social Security up to the annual limit, and 2.9% for Medicare with no limit) on 92.35% of net earnings from self-employment. One-half of the self-employment tax paid is deductible as an above-the-line deduction.
Why the other options are wrong
- A. This is incorrect; a portion of self-employment tax is always deductible.
- C. This is the total self-employment tax, not the deductible portion.
- D. This is an incorrect calculation of the deductible portion.
Deductible Self-Employment Tax
Self-employed individuals must pay both the employer and employee portions of Social Security and Medicare taxes (Self-Employment Tax). One-half of this self-employment tax is deductible as an above-the-line deduction.
- Self-employment tax is calculated on 92.35% of net earnings from self-employment.
- The tax rate is 15.3% (12.4% Social Security, 2.9% Medicare).
- There is an annual wage base limit for the Social Security portion.
- One-half of the self-employment tax paid is deductible on Schedule 1 of Form 1040.
Memory trick: Self-employment tax: 92.35% of income, then 15.3% tax, then HALF for the deduction.