Answered: How do I calculate self-employment…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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How do I calculate self-employment taxes with self-employment earnings. For example Bob Marks has self-employment earnings of 149,200, what would be his total self-employment taxes for 2021.

Expert Solution

Step 1

To calculate self-employment taxes for 2021, follow these steps:

Determine your net self-employment income. This is calculated by subtracting your business expenses from your self-employment earnings. In the example you provided, Bob's net self-employment income would be $149,200.

Calculate the Social Security tax. For 2021, the Social Security tax rate is 12.4% on self-employment income up to $142,800. For income above this amount, the Social Security tax rate is 0%. In Bob's case, he would owe Social Security tax on the full $149,200, since it is above the $142,800 threshold. Therefore, his Social Security tax would be $17,707.20 ($142,800 x 12.4% + $6,400 x 0%).

Calculate the Medicare tax. The Medicare tax rate is 2.9% on all self-employment income. In Bob's case, his Medicare tax would be $4,332.80 ($149,200 x 2.9%).

Add the Social Security tax and the Medicare tax together to get the total self-employment tax. In Bob's case, his total self-employment tax for 2021 would be $22,040 ($17,707.20 + $4,332.80).

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