Question

Sarah (single) is a 50 percent owner in Beehive LLC (taxed as a partnership). Sarah does not do any work for Beehive. Beehive LLC. reported $600,000 of taxable business income for the year (2020). Before considering her 50 percent business income allocation from Beehive and the self-employment tax deduction (if any), Sarah’s adjusted gross income is $150,000 (all employee salary). Show all work.

c. What is Sarah’s self-employment tax liability?

d. What is Sarah’s additional Medicare tax liability?

Answer 1

C ANS :

Self-Employment Tax

Self-employment tax is a tax consisting of Social Security and Medicare taxes primarily for individuals who work for themselves. It is similar to the Social Security and Medicare taxes withheld from the pay of most wage earners.

You figure self-employment tax (SE tax) yourself using Schedule SE (Form 1040 or 1040-SR). Social Security and Medicare taxes of most wage earners are figured by their employers. Also you can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct Social Security and Medicare taxes.

Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment. You calculate net earnings by subtracting ordinary and necessary trade or business expenses from the gross income you derived from your trade or business. All of your net earnings are subject to the Medicare tax.

D ANS :Additional Medicare Tax

• The Additional Medicare Tax has been in effect since 2013.
• Taxpayers who make over $200,000 or $250,000 for married couples are subject to an additional 0.9 percent tax on Medicare.
• The Additional Medicare Tax goes toward funding features of the Affordable Care Act.

The Additional Medicare Tax is an extra 0.9 percent tax on top of the standard tax payment for Medicare. The additional tax has been in place since 2013 as a part of the Affordable Care Act and applies to taxpayers who earn over a set income threshold.

Additional Medicare Tax went into effect in 2013 and applies to wages, compensation, and self-employment income above a threshold amount received in taxable years beginning after Dec. 31, 2012.and the medical tax rate is 0.9 percent .