Question

Mike, Matt, Brooke, and Kellie decide to go into business together. The form a limited partnership where Mike, Matt, and Brooke are the limited partners. They contribute the following amounts:

Mike - 25,000

Matt - 10,000

Brooke - 10,000

Kellie - 5,000

Additionally, the partnership agreement states that all profits are to be distributed equally. Mike will perform high level management services for the company and will be paid $130,000 a year for those services. The company will be able to deduct this amount from net income.

In the first year of operations, the company had the following items of income:

Services - 190,000

Expenses - 24,000

Tax Depreciation - 28,0000

Finally, no one withdraw any money from the partnership, save Matt who withdraws $15,000.

Using 2020 rates, what is the Self Employment Tax to be paid by Mike? (Enter in a properly rounded figure to nearest dollar)

i think it is $2000 times self employment tax rate, not sure though (also not sure what self employment tax rate is)

Answer 1

Calculation of Mike Share of Income

Services 190000

Expenses 24000

Tax depreciation 280000

Total 494000

Less:Mike share for performing high level 130000

Net Income of Partnership 364000

Mike share of income 364000/4 =91000

Add:Mike income for performing high level 130000

Total income of Mike $221000

His self-employment tax rate will be assessed on 92.35% x $221000 = $204094

As this amount is above the capped limit, his tax bill will be 15.3% x $132,900 = $20,334.

He can claim an above-the-line deduction for half of his self-employment tax, or $20,334 ÷ 2 = $10,166.85. In effect, he gets a refund on the employer portion (6.2% Social Security + 1.45% Medicare = 7.65%) of his self-employment tax.