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MODULE 33 TAXES: INDIVIDUAL
by the self-employment tax rate to compute Diamond's self-
employment tax for 2009. Since self-employment earnings
generally represent earnings derived from a trade or business
carried on as a sole proprietor, the $10,000 of interest in-
come from personal investments would be excluded from
the computation. On the other hand, a self-employed tax-
payer is allowed a deemed 'deduction equal to 7,65% of self-
employment earnings in computing the amount of net earn-
ings upon which the tax is based. The purpose of this
deemed deduction is to reflect the fact that employees do not
pay fleA tax on the corresponding 7.65% fleA tax paid by
their employers.
Gross receipts from business $150,000
Cost of goods sold (80,000)
Operating expenses OOQQQ)
Self-employment earnings $ 30,000
Less deemed deduction (100%- 7.65%) x~%
Net earnings to be multiplied by self-
employment tax rate $~
183. (c) The requirement is to determine the amount of
Freeman's income that is subject to self-employment tax.
The self-employment tax is imposed on self-employment
income to provide Social Security and Medicare benefits for
self-employed individuals. Self-employment income in-
cludes an individual's net earnings from a trade or business
carried on as sole proprietor or as an independent contractor.
The term also includes a partner's distributive share of part-
nership ordinary income or loss from trade or business ac-
tivities, as well as guaranteed payments received by a part-
ner for services rendered to a partnership. Self-employment
income excludes gains and losses from the disposition of
property used in a trade or business, as well as a share-
holder's share of ordinary income from an S corporation.
184. (a) The requirement is to determine the amount of
Rich's net self-employment income. Income from self-
employment generally includes all items of business income
less business deductions. Excluded from the computation
would be estimated income taxes on self-employment in-
come, charitable contributions, investment income, and
gains and losses on the disposition of property used in a
trade or business. An individual's charitable contributions
can only be deducted as an itemized deduction. Rich's net
self-employment income would be
Business receipts $20,000
Air conditioning parts (2,500)
Yellow Pages listing (2,000)
185. Business
(c) telephone callsis
The requirement to determine ....{1QQ)
the correct
$~
statement regarding the self-employment tax. The self-
employment tax is imposed at a rate of 15.3% on individuals
who work for themselves (e.g., sole proprietor, independent
contractor, partner). One-half of an individual's self-
employment tax is deductible from gross income in arriving
at adjusted gross income.
186. (c) The requirement is to determine the correct
statement with regard to social security tax (fleA) withheld
in an amount greater than the maximum for a particular
year. If an individual works for more than one employer,
and combined wages exceed the maximum used for fleA
purposes, too much FleA tax will be withheld. In such
case, since the excess results from correct withholding by
two or more employers, the excess should be claimed as a
473
credit against income tax. Answer (a) is incorrect because
the excess cannot be used as an itemized deduction. An-
swer (b) is incorrect because if employers withhold cor-
rectly, no reimbursement can be obtained from the employ-
ers. Answer (d) is incorrect because if the excess fleA tax
withheld results from incorrect withholding by anyone em-
ployer, the employer must reimburse the excess and it can-
not be claimed as a credit against tax.
187. (b) The requirement is to determine Berger's gross
income from self-employment for 2009. Self-employment
income represents the net earnings of an individual from a
trade or business carried on as a proprietor or partner, or
from rendering services as an independent contractor. The
director: s fee is self-employment income since it is related
to a trade or business, and Berger is not an employee. Fees
received by a fiduciary (e.g., executor) are generally not
related to a trade or business and not self-employment in-
come. However, executor's fees may constitute self-
employment income if the executor is a professional fiduci-
ary or carries on a trade or business in the administration of
an estate.
188. (d) The requirement is to determine Smith's gross
income from self-employment. Self-employment income
represents the net earnings of an individual from a trade or
business carried on as a sole proprietor or partner, or from
rendering services as an independent contraclor (i.e., not an
employee). The $8,000 consulting fee and the $2,000 of
director's fees are self-employment income because they are
related to a trade or business and Smith is not an employee.
VI.A. General Business Credit
189. (c) The requirement is to determine which credit is
not a component of the general business credit. The general
business credit is a combination of several credits that pro-
vide uniform rules for current and carryback-carryover
years. The general business credit is composed of the in-
vestment credit, work opportunity credit, alcohol fuels
credit, research credit, low-income.housing credit, enhanced
oil recovery credit, disabled access credit, renewable .
electricity production credit, empowerment zone
employment credit, Indian employment credit, employer
social security credit, orphan drug credit, the new markets
credit, the smallemployer pension plan start-up costs credit,
and the employer-provided child care facilities credit. A
general business credit in excess of the limitation amount is
carried back one year and forward twenty years to offset tax
liability in those years.
190. (a) The requirement is to determine which tax credit
is a combination of credits to provide for uniform rules for
the current and carryback-carryover years. The general busi-
ness credit is composed of the investment credit, work op-
portunity credit, welfare-to-work credit, alcohol fuels credit,
research credit, low-income housing credit, enhanced oil
recovery credit, disabled access credit, renewable electricity
production credit, empowerment zone employment credit,
Indian employment credit, employer social security credit,
orphan drug credit, the new markets credit, the small em-
ployer pension plan start-up costs credit, and the employer-
provided child care facilities credit. A general business
credit in excess of the limitation amount is carried back one
year and forward twenty years to offset tax liability in those
years.