Question

Andrea is an employee of Fern Corporation. She also has her own business working as a life coach. For 2017, Andrea’s wages from Fern were $210,000. Her self-employment income was $30,000 (line 4, Form SE, based on 92.35% of net earnings as a life coach). If required, round any computations to two decimal places. Round final answers to the nearest dollar.

a. Compute the payroll, self-employment, and additional Medicare taxes for Andrea for 2017. $______

b. Assume the same facts except that Andrea’s 2017 self-employment activities resulted in a loss of $15,000. Compute the payroll, self-employment, and additional Medicare taxes for Andrea for 2017. $___________

c. Compute Andrea’s NIIT for 2017 using wages of $210,000, self-employment income of $30,000 and NII of $20,000. There are no expenses allocable to any investment income. $________

Answer 1

a.

Computation of Tax payable by Andrea for the year 2017

Particulars	Social Security	Medicare
Payroll tax
Wages	$210,000	$210,000
Tax payable(A) [See Note 1]	$7,886.4	$3,135
Self-employment tax
Adjusted earnings	$30,000	$30,000
Gross Tax [See Note 2]	--	$1,140
Tax deductible portion	--	($435)
Tax payable(B)		$705
Total tax	$7,886.4	$3,840

Total payroll, self employment and medicare taxes for Andrea for 2017 is $12,431.4

Note 1: The tax payable for social security is subject to limit of $127,200. Since wages of Andrea is above the maximum limit, she needs to pay tax only on $127,200 @6.2% = $7,886.4

Tax towards medicare is 1.45% with additional 0.9% if income exceeds $200,000. Tax upto $200,000 is $2,900 and for $10,000, it is $10,000*2.35%=$235. Total turns out to be $3,135

Note 2: No tax is payable on social security for self employed income since the total income has exceeded the maximum limit of $127,200.

The tax rate for medicare shall be 2.9% (1.45*2) and additional 0.9%since the total taxable income has exceeded $200,000.

Medicare tax $870 ($30,000*2.9%) + $270 ($30,000*0.9%) = $1,140

Note 3: Tax deductible portion fo self employed tax

That amount of tax portion shall be allowed as deduction which would have been withheld by employer had the income was from employment. Therefore tax portion of 1.45% of income related to Medicare shall be allowed as deduction. 0.9% shall not be allowed as deduction since employer is not liable to deduct the additional medicare tax. Deduction portion = $30,000*1.45%= $435

b.

Particulars	Social Security	Medicare
Payroll tax
Wages	$210,000	$210,000
Tax payable(A)	$7,886.4	$3,135
Self-employment tax
Adjusted earnings	($15,000)	($15,000)
Tax payable(Note 3)	--	--
Total Tax	$7,886.4	$3,135

Total tax payable = $11,021.4

Note 3: Since the income earned is less than $400, there will not be any liability towards SE tax.

c.

Applicablility Of NIIT: The Net Investment Income tax is applicable only when the Net investment income and the modified adjusted income exceeds $200,000 for individuals who are single.

Since Andrea has exceeded the threshold limit of $200,000, NIIT is payable.

Rate of Tax; 3.8% of Net Investment Income

NIIT payable = $20,000* 3.8% = $760