CPA Exam — REG (Regulation)Federal Taxation of IndividualsMedium
A taxpayer, single, age 30, works as an independent contractor and receives $50,000 in 1099-NEC income. They incurred $10,000 in allowable business expenses. What is their gross income for tax purposes?
- A$60,000
- B$50,000
- C$40,000
- D$0
Show answer & explanationAnswer & explanation
Correct answer: B. $50,000
Gross income includes all income from whatever source derived, unless specifically excluded. For self-employment, the gross income is the total revenue received before deducting business expenses. Business expenses are deducted to arrive at net self-employment income, which then flows into Adjusted Gross Income (AGI).
Why the other options are wrong
- A. This is an arbitrary incorrect amount.
- C. This is net self-employment income, not gross income.
- D. This is incorrect; the 1099-NEC income is taxable.
Gross Income (Self-Employment)
For self-employed individuals, gross income generally refers to the total revenue or receipts generated from their business activities before deducting any business expenses.
- Gross income is the starting point for income tax calculations.
- Business expenses are deducted from gross income on Schedule C to arrive at net profit.
- Net profit from self-employment is then included in the calculation of Adjusted Gross Income (AGI).
- The definition of gross income is broad, encompassing all income from whatever source derived unless specifically excluded.
Memory trick: Gross Income: All In, Before Out; Net Income: After the Cut.