Question

for irs purposes taxable compensation for a self-employed individual is equal to net taxable earnings from the self employed individual's trade or business:

a. not reduced by any amount and not increased by any other income of the taxpayer

b. reduced by the deduction for half of the self employment tax and any deductions for contributions to a retirement plan. other taxpayer contribution is considered as w2 wagws, alimony received under separate maintenance and commissions

c. reduced by the deduction for half of the self employment tax and any deductions made on the self-employed's behalf forcontributions to a retirement plan. no other compensation of the individual is taken into consideration

d. reduced only by the deduction for half of the self employment tax. no other compensationof the individual is taken into consideration

Answer 1

Sol: Before procedding to the solution. lets have an overview of Self Employment Tax.
As per IRS guidance you are considered self-employed if you are :- A sole proprietor of a business or trade, An independent contractor/Freelancer or Part of a partnership that carries on a trade or business.Self-employment tax is imposed to pay for Social Security and Medicare.
Self-employed people who earn more than $400 a year have to pay the tax.
The rate of Self Assessment Tax is 15.30 % which is comprised of :- Medicare (2.90%) and Social Security Tax (12.40%). Self-employment tax is a tax-deductible expense. While the tax is charged on a taxpayer’s business profit, the Internal Revenue Service allows them count the employer half of the self-employment tax, or 7.65% (calculated as half of Self Assessment Tax i.e. 15.30%), as a business deduction for purposes of calculating the tax.

Option - D - Reduced only by the deduction for half of the self employment tax. no other compensationof the individual is taken into consideration