Candy is an employee of Jimmy, Inc. She receives a salary of $108,000. The compa

Question

Candy is an employee of Jimmy, Inc.

She receives a salary of $108,000. The company provides medical insurance that would cost Candy $750 per month and matches Candy’s $500 per month contribution to the company’s Section 401(k) plan. Candy ‘s employer pays 3% of net income for unemployment insurance and 4% of net income for industrial accident insurance (i.e., workers’ compensation).

Assume Candy’s other income equals her other deductions, so the income from the business is her taxable income. Assume Candy’s federal income tax is a flat tax of 18% of taxable income.

Calculate Candy’s after-tax cash flow from this job. Ignore other income and deductions, including the standard deduction and the exemption deduction. Include the unemployment and workers comp at full value. Complete the Spreadsheet for Candy [5 Points Possible]

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Candy has income and deductions as a consultant for 2015 that are summarized as follows: Gross income from sole proprietorship $156,500 Cash operating expenses for sole proprietorship 30,400 Candy pays for her own medical insurance coverage at $750 per month and places $1,000 per month in a personal retirement account. Candy pays 3% of net income for unemployment insurance and 4% of net income for industrial accident insurance. The former is not deductible; the latter is. Assume Candy’s federal income tax is a flat tax of 18% of taxable income. Assume Candy’s other income equals her other deductions, so the income from the business is her taxable income. Also, note that a self-employed individual can deduct the cost of his or her medical coverage.

Calculate Candy’s after-tax income.

NOTE: The medical benefit value and the retirement account value are not included. You may add them, but since the benefit is the same as an employee and as an independent contractor, they are irrelevant. A cost is irrelevant to a decision if it is the same for each of the situations being considered.

Medical & Retirement

EMPLOYEE Salary $108,000 Retirement $6,000 Net Taxable $102,000 TAX $18,360 Cash Flow Net from Above $102,000 Social Secuity Tax $ (6,696) Medicare Tax $ (1,566) Income Tax $ (18,360) Unemployment Insurance $ 3,240 Workers' Compensation $ 4,320 $75,378 INDEPENDENT CONTRACTOR Gross $156,500 Operating Expenses $ (30,400) Net Income $ 126,100 Calculate SE Tax Multiply by: 92.35% SS Tax Medicare Tax TOTAL SE TAX Net Income One half of SETax Medical Insurance Retirement Taxable TAX Cash Flow Net from Above Self-Employment Tax

Medical & Retirement

Income Tax

Explanation / Answer

EMPLOYEE Salary $1,08,500.00 Retirement -$500.00 Net Taxable $1,08,000.00 TAX $19,440.00 Cash Flow Net from Above $1,08,000.00 Social Secuity Tax @ 6.2% -$6,696.00 Medicare Tax @ 1.45% -$1,566.00 Income Tax -$19,440.00 Unemployment Insurance $4,320.00 Given to be included Workers' Compensation $3,240.00 Given to be included Cash Flow $87,858.00 Cash Flow $87,858.00 Add SS by employer $8,262.00 Income from emplyment $96,120.00 INDEPENDENT CONTRACTOR Gross $1,56,500.00 Operating Expenses -$30,400.00 Net Income $1,26,100.00 Calculate SE Tax Multiply by: 92.35% $1,16,453.35 SS Tax @ 12.4% $14,440.22 Medicare Tax @ 2.9% $3,377.15 TOTAL SE TAX $17,817.36 Net Income $1,26,100.00 One half of SETax -$8,908.68 Medical Insurance -$750.00 Retirement Taxable -$1,000.00 TAX -$20,779.44 Net from Above $1,26,100.00 Self-Employment Tax -$17,817.36 Income Tax -$20,779.44 After tax income $87,503.20 The after tax income is higher in Employment, it is more suitable to go for employment

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