[JimmySungChen]

Hello guys,

I am just confused about one point, it’s Question 2 of R1 Simulation 2 for Becker’s. For the Net earnings from self employment the answer is $96,968 because they said that only 92.35% of the Total Self-Employment Income ($105,000) is defined?? I don’t get why they took out 7.65% off??? Please help, and the solution doesn’t explain at all, it just said “Only 92.35% of the amount on line 1 is actually defined as net earnings from self employment. $105,000 x 0.9235 = $96,968.” …. what?

Please help if anybody knows where they got it from? Thank you!

 

 

[Future Rhody CPA]

7.65% is the employer portion of the Self Employment tax

FAR- 96 (January 2016)
BEC- 94 (January 2016)
REG- 87 (April 2016)
AUD- (July 30th 2016)

[Anonymous]

This is the SIM problem, right?
Richard Norton is required to pay a self-employment tax based on the net profits of the farm business.
For purposes of this this task, assume that Richard had a net profit of $105,000 from the farm business for Year 3 and $10,000 of Section 1231 Gain.
Also assume that the maximum NI for SS tax is $117,000 for Year 3.
Assume the ff. rates: 12.4% for SS and 2.9% for Medicare:
Complete the ff. items:
1. Total amt. of SEI
2. Net earnings from self-employment
3. Self-employment tax
4. Adjustment for self-employment tax paid
Answers/Explanation:
1. $105,000
The facts tell us that Richard Norton is required to pay self-employment tax based on net profits of the business. Further, we are given the assumed net profit of $105,000 for Year 3 for this purpose. We are given an amount of $10,000 for Section 1231 gain; however, this amount is not considered self-employment income, as it receives capital gain treatment. Again, no knowledge of farming activities is necessary to calculate the self-employment tax and answer the question on this tab.

2. $96,968
Only 92.35% of the amount on line 1 is actually defined as net earnings from self employment. $105,000 × 0.9235 = $96,968.

3. $14,836
The full amount of net earnings from self employment is below the social security maximum for the year. Therefore, the entire amount is subject to the full 15.3% tax (12.4% social security and 2.9% Medicare). $96,968 × 0.153 = $14,836.

4. $7,418
Self employed taxpayers are allowed to take an adjustment deduction on Form 1040, Page 1 for 50% of the self-employment tax paid. $14,836 × 50% = $7,418.

[Anonymous]

The explanations are shallow and not detailed enough to explain to students what goes (income/tax) to where (what form).
They way I understand this case is that, the farmer as self-employed has to remit to IRS 15.30% SE tax from his net income consisting of 12.4% for SS and 2.9% for Medicare.
Half of SET, which is 7.65% [$7418] is tax deductible (Above The Line-F1040) while the other half represents the employer's share of SS and Medicare tax.
The answer for question #2 ($96,968) goes to the taxpayer's Schedule C or C-EZ, line #12 of F-1040.

I have questions to tax experts about this scenario.
When do self-employed people/farmers/business owners remit this SET of 15.3% to IRS?
What is the required form to remit SET? Would that be same Schedule C or C-EZ?

[Author]

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