Question

Brienne has worked for a local CPA firm for about five years. She would like to start her own photography business but needs to continue to work as a CPA to cover her living expenses and the start-up costs for her photography business. The CPA firm has offered to let Brienne work as a part-time employee. She can work during the fall and spring advising clients and preparing returns, and then focus on her photography business in the winter and summer when demand for photo sessions is higher. Her salary would be $45,000 to work 26 weeks – from February 1 through May 17 and from August 15 through October 31, and would include health insurance and other fringe benefits.Brienne’s friend works at a different CPA firm. That firm offered to higher Brianne as an independent contractor and pay her $40/hour with the expectation that she would work about 1,250 hours during the spring and fall busy seasons. Required:1. Assume Brienne stays at her current CPA firm. What is her share of employment taxes? Round down to the nearest whole number. (1 point)2. Assume Brianne’s taxable income is $32,800. What is her income tax liability for the year? (2 points)3. What are Brienne’s after-tax cash flows if she stays at her current CPA firm? Consider alltaxes. (2 points)4. Assume Brienne works 1,250 hours at the other CPA firm and has $5,000 of deductible expenses directly related to her work there. What are her self-employment taxes? Round down to the nearest whole number. (1 point)5. Assume Brienn’s taxable income without regard to the self-employment tax deduction is $32,800. What is her income tax liability for the year? (2 points)6. What are Brienne’s after-tax cash flows is she is self-employed? Consider all taxes. (2 points)

Answer 1

1. In case 1, where Brienne is working as an employee in the current CPA firm , she is earning

$ 45,000 for the time period she is working with the firm. In case of employment , FICA (viz Federal Insurance Contributions Act ) tax is to be paid which covers the social security as well as the medicare . The percentage of social security being 6.2% and the healthcare being 1.45%. This totals to 7.65% of the gross wages or salary of the employee. Both the the employer and employee need to make an equal contribution .

In this case, the share of Brienne in employment taxes will be = $ 45,000 x 7.65% =$ 3,443

2. If Brienne's taxable income is $ 32,800, her tax liability will be as follows :

She is a single unmarried taxpayer .

If the  income tax rates for the year 2019 are been considered ,her taxable income falls in the bracket of 12% - where income is between $ 9701 to $ 39,475.

She will be eligible for a standard deduction of 12,200.

Taxable income = 32800-12200=20600

So tax = (20,600-9700) x 12%+9700 x10 %= $ 2,278

She is not eligible for the deduction of payroll taxes from her income tax liability.

3. After tax cash flows of Brienne, if she stays at her current CPA firm will be Taxable income - Tax paid = $ 32,800-2,278 - FICA $ 3,443 =$ 27,079

4. If Brienne gets employed at the other CPA firm, her income will be 50,000 ($ 40 x 1250 hours)

Since she will be an independent contractor , she is eligible for the deduction of taxes of 5,000.

Her Self employment tax will be 15.3% of net earnings i.e $ 50,000-$ 5000 =$45,000 which will be 45000 x 15.3% = $6,885.

5. If Brienne's taxable inocme without considering her , self employement taxes is 32,800 , her tax liability would be as follows :

Brienne is eligible for a tax deduction of upto 50 % of taxes paid from her taxable income which will be equal to 32,800- (6,885 x 50%)= $ 3,443.

Her income tax liability will be calculated on $ 32,800-$ 3443- Std deduction 12,200=$ 17,157

For 2019: (17,157 -9700) x 12% +970= $ 1,865

6. After tax cash flows of Brienne , if she is self employed will be

For 2019 : 32,800-6,885 -1,865= $ 24,050