Question

During the current year, Eleanor earns $120,000 in wages as an employee of an accounting firm. She also earns $13,000 in gross income from an outside consulting service she operates. Deductible expenses paid in connection with the consulting service amount to $3,000. Eleanor also incurs a recognized long-term capital gain of $1,000 from the sale of a stock investment. She must pay a self-employment tax on:

Answer 1

Answer:

$10,000

Explanation:

Eleanor's self-employment tax will require an understanding of a few points.

1. Eleanor earns $120,000 as wages working for an accounting firm therefore, this wages do not qualify for self-employment tax

2. Eleanor earns $13,000 as gross income for her own  consulting service and this is self-employment income. However, $3,000 qualify as deductible expenses from the gross income. Taxable self-employment income= $13,000-$3,000= $10,000

3. Long term capital gain tax incurred = $1,000. Ordinarily the capital gain tax should increase the tax.  However, its inclusion will be based on the federal government's table for calculating payment of long-term capital gain tax for 2019 based on income for the year.

Looking at the table, income from $0 Up to $39,375 will attract 0% payment of long-term capital gain tax. Since, the self-employment income of Eleanor is $10,000, no long-term capital gain tax will be incurred.

It means only the 13,000-3,000= $10,000 will be tax for self employment