Question

In 2020, Miranda records net earnings from self-employment of $174,000. She has no other gross income. Determine the amount of Miranda's self-employment tax and her for AGI income tax deduction. In your computations round all amounts to two decimal places. Round your final answers to the nearest dollar.

Miranda's self-employment tax is $ ____ and she has a $____ deduction for AGI.

Answer 1

When an owner's allocation of business income is determined to be self - employment income, the owner must pay self-employment tax and potentially the additional Medicare tax on income.
Both the self-employment tax and additional Medicare tax are based on the taxpayer's net earnings from self-employment. And net earnings from self-employment is 92.35 percent of a taxpayer's self employment income.

The self-employment tax rate is 15.3% of net earnings, which is the sum of a 12.4% Social Security tax and a 2.9% Medicare tax on net earnings.

For 2020, the first $137,700 of earnings is subject to the Social Security portion.

Taxpayer's can deduct 50% of the self-employment taxes they pay as a for AGI deduction.

So in Miranda's case,
Self employment tax will be
= $137,700 * 12.4% + ($174,000-$137,700) * 2.9%
= $18,127.5

And AGI deduction will be $18,127.5 * 50%
=$9,063.75

So, after roundoff, Miranda's self-employment tax is $18,128 and AGI Income tax deduction is $9,064.

Note: No additional Medicare tax as earned income is less than $200,000.

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