Question

Kiyara (single) is a 50 percent shareholder of Jazz Corporation (an S Corporation). Kiyara does not do any work for Jazz Corp. Jazz Corp. reported $300,000 of business income for the year (2020). Before considering her business income allocation from Jazz Corp. and the self-employment tax deduction (if any), Kiyara’s adjusted gross income was $250,000 (all employee salary). Answer the following questions for Kiyara. (Leave no answer blank. Enter zero if applicable.)

a. Assuming the income allocated to Kiyara is qualified business income, what is Kiyara’s deduction for qualified business income?

b. What is Kiyara’s net investment income tax liability (assume no investment expenses)?

c. What is Kiyara’s self-employment tax liability?

d. What is Kiyara’s additional Medicare tax liability (include all earned income)?

Answer 1

a. Business Income allocated to Kiyara = $3,00,000 X 50% = $150,000.

Qualified Business Income to Kiyara = $150,000

Deduction for Qualified Business Income to Kiyara = $150,000 X 20% = $30,000.

b. Kiyara's Net Investment Income Tax Liability.

Net Investment Income Tax Rate = 3.80%

NIIT Rate 3.8% tax will be applied to the least of

• Either your Net investment income (NII) or
• the amount by which your Maximum Adjusted Gross Income (MAGI) exceeds the threshold limit

Threshold limit for Kiyara (SINGLE) is $2,00,000

So, Net Investment Income Tax Liability =

• NII = $1,50,000 or
• MAGI = ($150,000 + $250,000) - $2,00,000 = $2,00,000

  least is Net Investment Income amounting to $ 1,50,000.

Net Investment Income Tax Liability = $1,50,000 X 3.80% = $5,700.

c. Generally, the amount subject to self-employment tax is 92.35% of your net earnings from self-employment.

Self-Employment Income = $250,000.

Self-Employment Income subject to Self Employment taxes = $250,000 X 92.35% = $230,875.

For 2020,only the first $137,700 of earnings was subject to the Social Security portion of self-employment tax

Social Security Portion (FICA) = $137,700, X 12.40% = $17,074.80

Medicare Tax for 2020 = $230,875 X 2.90% = $6,695.38

Total Self Employment Taxes for 2020 = $17,074.80 + $6,695.38

= $23,770.18

d. A 0.90% Additional Medicare Tax may also apply if your net earnings from self-employment exceed $200,000 if you’re a single filer.

Additional Medicare Tax Liability of Kiyara = [($250,000 + $150,000) - $200,000] X 0.90%

= $200,000 X 0.90%

= $1,800