Exam 8: Individual Income Tax Computation and Tax Credits

Correct Answer:

Verified

$2,543.
Answer computed as follows:
$\begin{array}{llcc} \text { Description } & \text {Amount } & \text { Reference } \\ \text { Limit on Social Security wage } &\\ \text { (1) base } &\$132,900\\ \text {(2) Employee compensation } &38,000\\ \text {(3) Limit on Social Security base for } &\\ \text { self-employment tax purposes } &94,900&(1)-(2)\\ \text {(4) Self-employment income } &\$18,000 \\ \text { Net earnings from self- } &\\ \text { (5) employment percentage } &92.35\%&(1)×(4)\\ \text { Net earnings from self- } &\\ \text { (6) employment } &16,623&(4)×(5)\\ \text { Social Security portion of self- } & \text { [Lesser of (3) or \( (6)] \times \)}\\ \text { (7) employment tax } & 2,061&12.4 \% \\ \text { (8) Medicare portion of selfe- } &482& \text { (6) \( \times 2.9 \% \). Note that}\\ \text { mployment tax} & &\text { Harmony is not subject to } \\&& \text { the additional Medicare tax }\\&& \text { because her net selfe- } \\ &&\text {mployment earnings do } \\&& \text { not exceed \( \$ 200,000 \). }\\ \text {Total self-employment tax } &\$2,543&(7)+(8)\\\end{array}$