Tax Preparation Self-Employment and Business Taxes 1 — Questions and Answers
Question 1: Self-employment tax is composed of which two components?
- Federal income tax and state income tax
- Social Security tax and Medicare tax (Correct answer)
- FUTA and SUTA
- Corporate tax and excise tax
Correct answer: Social Security tax and Medicare tax
Self-employment tax consists of 12.4% for Social Security and 2.9% for Medicare, totaling 15.3%, covering both the employee and employer shares.
Question 2: A self-employed taxpayer may deduct what portion of their self-employment tax from gross income?
- None
- 25%
- 50% (Correct answer)
- 100%
Correct answer: 50%
Self-employed taxpayers can deduct 50% of self-employment tax as an adjustment to income, mimicking the employer's deductible share.
Question 3: A home office deduction for self-employed individuals requires the office space to be used:
- Primarily for business
- Exclusively and regularly for business (Correct answer)
- Occasionally for business
- For any work-related activity
Correct answer: Exclusively and regularly for business
The home office deduction requires exclusive and regular use as the principal place of business, not merely primary or occasional use.
Question 4: Schedule C net profit of $40,000 is subject to self-employment tax on what amount?
- $40,000
- $38,000
- $36,940 (Correct answer)
- $37,000
Correct answer: $36,940
Self-employment tax is calculated on 92.35% of net earnings: $40,000 × 0.9235 = $36,940.
Question 5: A sole proprietor can deduct contributions to a SEP-IRA up to what percentage of net self-employment earnings?
- 10%
- 15%
- 25% (Correct answer)
- 50%
Correct answer: 25%
SEP-IRA contributions are limited to 25% of net self-employment compensation (after SE tax deduction), up to an annual dollar cap.
Question 6: A freelancer's Schedule C shows $15,000 net profit. What is their self-employment tax (rounded)?
- $1,147
- $2,120 (Correct answer)
- $2,295
- $3,060
Correct answer: $2,120
SE tax = $15,000 × 0.9235 × 0.153 = approximately $2,120.
Tax Preparation Self-Employment and Business Taxes 1
Self-employment tax is composed of which two components?