CPA Exam — REG (Regulation)Federal Taxation of IndividualsMedium
A self-employed client, age 38, reported net earnings from self-employment of $120,000 for the current tax year. What is the maximum amount of the self-employment tax that they can deduct for adjusted gross income (AGI) purposes?
- A$8,478
- B$18,360
- C$17,640
- D$9,180
Show answer & explanationAnswer & explanation
Correct answer: D. $9,180
The deductible portion of self-employment tax is 50% of the total self-employment tax paid. Self-employment tax is 15.3% (12.4% for Social Security up to the annual limit, plus 2.9% for Medicare) on 92.35% of net earnings from self-employment.
Why the other options are wrong
- A. This calculation is incorrect, perhaps using an incorrect self-employment tax rate or base.
- B. This is an incorrect calculation for either the full or deductible portion of self-employment tax.
- C. This represents the full self-employment tax, not the deductible portion.
Deductible Self-Employment Tax
Self-employed individuals can deduct one-half of their self-employment tax paid as an above-the-line deduction to arrive at AGI.
- Self-employment tax is calculated on 92.35% of net earnings from self-employment.
- The tax rate is 15.3% (12.4% Social Security up to limit, 2.9% Medicare).
- Only 50% of the total self-employment tax is deductible.
Memory trick: Half your self-employment burden, half your tax savings.