Bill owns 100% of an S corporation. In 2016, the corporation paid Bill a salary
ID: 3122967 • Letter: B
Question
Bill owns 100% of an S corporation. In 2016, the corporation paid Bill a salary of $100,000. Bill’s share of S corporation income for the year was $42,000. Assuming this is Bill’s only income for 2016.
Assume the Social Security rate is 6.2% and Medicare rate is 1.45%. If an amount is zero, enter "0". If required, round your answers to nearest dollar.
a. What amount that Bill received is subject to payroll taxes? $_________ To self-employment taxes? $_________
b. Compute Bill’s payroll and self-employment income taxes. Bill’s payroll taxes: $_________ Self-employment income taxes: $_________
Explanation / Answer
Bill is getting $100,000 as salary, so $100,000 will be subject to payroll taxes.
Self employment tax is calculated on the adjusted self-employment income. Adjusted self-employed income = self employed income under tax considerations - 7.65% of net income.
Here net income is $42,000, so the factor by which we shall adjust is 42000*7.65% = $3213.
But when you are self employed social security tax is applied only on first $127,200 of income. Payroll comes first in these calculations, so out of his income from shares only 27,200 enter into social security tax calculations.
Thus amount which is subjected to medicare tax is 42000-3213 = $38787.
Amount which is subjected to social security tax is 27200-3213 = $23987.
b. Bill's payroll taxes = (100,000)*((6.2+1.45)%) = 100,000*7.65% = $7650.
Notice that in self-employed taxes, the individual is required to pay employers share as well. So medicare tax is 1.45+1.45 = 2.9 % and social security tax is 6.2+6.2 = 12.4%.
Bill's self-employment taxes = medicare tax + social security tax = $38787*2.9% + $23987*12.4%
= $1124.8 + 2974.38 = 4099.18.
Rounding off, Bill will have to pay $4099 as self employment taxes.
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