Question

Kyle, a single taxpayer, worked as a free-lance software engineer for the first three months of 2017. During that time, he earned $88,000 of self-employment income. On April 1, 2017, Kyle took a job as a full-time software engineer with one of his former clients, Hoogle Inc. From April through the end of the year, Kyle earned $204,000 in salary. What amount of FICA taxes (self-employment and employment related) does Kyle owe for the year? (Round your intermediate calculations to the nearest whole dollar amount.)

Answer 1

The total amount of FICA taxes (self-employment and employment related) are calculated as below:

Step 1: Calculate Social Security Tax Paid as an Employee

The amount of social security tax paid as an employee is determined as below:

Amount of Social Security Tax Paid as an Employee = 6.2% of $204,000 or $127,200 whichever is less = 6.2%*127,200 = $7,886.40 or $7,886

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Step 2: Calculate Net Earnings from Self-Employment

The value of net earnings from self-employment as per applicable rules is arrived as below:

Net Earnings from Self-Employment = Total Amount off Self-Employment Income*92.35% = 88,000*92.35% = $81,268

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Step 3: Calculate Social Security Portion of Self-Employment Tax

The social security portion of self-employment tax is calculated on the lower of social security wage base limit less employee compensation subject to social security tax or net earnings from self employment.

Here, Social Security Wage Base Limit - Employee Compensation subject to Social Security = 127,200 - 127,200 = 0 and Net Earnings from Self Employment = $81,268

Now, we can calculate the social security portion of self-employment tax as below:

Social Security Portion of Self-Employment Tax = 0*12.4% = 0

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Step 4: Calculate Employer Portion of Medicare Tax for Self-Employment Tax Purposes

The employer portion of medicare tax for self-employment tax purposes is determined as follows:

Employer Portion of Medicare Tax for Self-Employment Tax Purposes = Net Earnings from Self Employment*1.45% = 81,268*1.45% = $1,178.39 or $1,178

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Step 5: Calculate Sum of Kyle's Compensation and Net Earnings from Self Employment

The sum of Kyle's compensation and net earnings from self employment is equal to $285,268 (204,000+81,268)

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Step 6: Calculate Employee's Portion of Medicare Tax

The employee's portion of medicare tax is calculated as below:

Employee's Portion of Medicare Tax = (Lesser of Amount Determined in Step 5 or $200,000)*1.45% + (Amount Determined in Step 5 - 200,000)*2.35% = 200,000*1.45% + (285,268 - 200,000)*2.35% = $4,903.80 or $4,904

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Step 7: Calculate Amount of FICA Taxes

The amount of FICA taxes is arrived as below:

Amount of FICA Taxes = Social Security Tax Paid as an Employee + Social Security Portion of Self-Employment Tax + Employer Portion of Medicare Tax for Self-Employment Tax Purposes + Employee's Portion of Medicare Tax

Using the values calculated above, we get,

Amount of FICA Taxes = 7,886 + 0 + 1,178 + 4,904 = $13,968 (answer)