Homework Answers
Computation of tax payable by Andrea for the year 2020
Particulars Social Security Medicare
Payrolltax
Wages $2,10,000 $2,10,000
Tax payable (A) $7,886.4 $3,135
[See Note 1]
Self-employmenttax
Adjusted earnings $30,000 $30,000
Gross Tax
[See Note 2] -- $1,140
Tax deductible
portion -- ($435)
Tax payable(B) - - $705
Total tax $7,886.4 $3,840
Employment and medicare taxes forAndrea for 2020 is $12,431.4
Note 1: The tax payable for social security issubject to limit of $127,200. Since Andrea's wages are above the maximum limit, she only has to pay tax on $127,200 @6.2% =$7,886.4
Tax towards medicare is 1.45% with additional 0.9% if incomeexceeds $200,000. Tax up to $200,000 is $2,900 and $10,000 is $10,000*2.35%=$235. Total turns out to be $3,135
Note 2: No tax is payable on social securityfor self employed income since the total income has exceeded themaximum limit of $127,200.
The medicare tax rate shall be 2.9% (1.45*2) and additional0.9%since the total taxable income has exceeded $200,000.
Medicare tax $870 ($30,000*2.9%) + $270 ($30,000*0.9%) =$1,140
Note 3: Tax deductible portion fo self employedtax
That amount of tax portion shall be allowed as deduction whichwould have been withheld by employer had the income was fromemployment. Hence the tax portion of 1.45% of income related toMedicare shall be allowed as deduction. 0.9% shall not be allowedas deduction since employer is not liable to deduct the additionalmedicare tax. Deduction portion = $30,000*1.45%= $435
b)
Particulars Social Security Medicare
Payroll tax
Wages $210,000 $210,000
Tax payable(A) $7,886.4 $3,135
Self-employmenttax
Adjusted earnings ($15,000) ($15,000)
Tax payable(Note 3) - - - -
Total Tax $7,886.4 $3,135
Total Tatax payable = $11,021.4
Note 3: Since the income earned is less than$400, there will not be any liability towards SE tax.
C)
Applicablility Of NIIT: The Net InvestmentIncome tax is applicable only when the Net investment income andthe modified adjusted income exceeds $200,000 for individuals whoare single.
Since Andrea has exceeded the $200,000 threshold, NIITis is payable.
Rate of Tax; 3.8% of Net Investment Income
NIIT payable = $20,000* 3.8% =$760
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