Problem 1. Introduction to FICA & SECA Tax. Mary is a single taxpayer who has in

Question

Problem 1. Introduction to FICA & SECA Tax. Mary is a single taxpayer who has income of $150,000 in 2018. Please use the tax rates and wage base limits applicable to FICA, SECA, and NIIT, as applicable, as described in the “FICA and SECA Taxes in a Nutshell” article and in the Packet (part 1) to complete the following calculations (Noting that the 2018 Wage base limit is $124,400).

Calculate Mary’s FICA tax obligation assuming she received this income as employee wages.

Now calculate Mary’s SECA tax obligation assuming she received this income as an independent contractor again using the tax rates and wage base limit applicable to SECA as described in the nutshell article.

Assume that, in addition to the $150,000 of income, Mary also earns $500,000 in capital gains from investments. Calculate any applicable Net Investment Income Tax (NIIT) on the $500K in earnings.

Problem 2. Income Taxes, QBI Deduction & SECA Tax. Bob, a married individual who files a joint return, is the sole owner of a business he anticipates will have $212,000 in net taxable income per year, $10,000 of which is derived from interest income and the business is not a specified service trade or business. Bob is trying to decide whether to organize the business as an LLC, a C-Corporation, or an S-Corporation. His attorney informed him that he’d have similar liability protection with any of these entities and so he is asking you about the tax consequences. Calculate the total income tax consequences including the Qualified Business Income Deduction (assume none of the Sec. 199A limitations apply to the deduction) as well as the SECA tax consequences for both Bob and the Business assuming all income flows through to Bob if it’s an LLC or S-Corporation and if it’s taxed as a corporation then all income after taxes is paid out as a dividend to Bob. Then determine which entity has the best tax result. Assume this is Bob and his spouse’s only income and that the first $24,000 of income (whether as flow through income or as a corporate dividend) is exempt from tax based on the Married Filing Jointly standard deduction for 2018. Use the tax calculation tables in Packet (part 1) to make this calculation.

Explanation / Answer

1 FICA Tax rate is 7.65% of gross wages Gross wage $150,000 Wage base limit $124,400 Social security tax rate 6.20% Social Security tax (wage base limit x tax rate) $7,712.80 Medicare tax rate 1.45% Medicare tax (gross wage x tax rate) $2,175.00 Total FICA Tax $9,887.80 2 SECA Taxes Gross wage $150,000 Wage base limit $124,400 Social security tax rate 12.40% Social Security tax (wage base limit x tax rate) $15,425.60 Medicare tax rate 2.90% Medicare tax (gross wage x tax rate) $4,350.00 Total FICA Tax $19,775.60 3 As Mary is a single and have adjusted gross income of $650,000 which is more than the threshold limit of $200,000, NIIT is applicable on her. NIIT rate is 3.8%. Capital gain $500,000 NIIT rate 3.80% NIIT $19,000

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