Question
Karl has a small farm with a net income of $69,000. He also earns $88,000 before taxes from his off-farm job at a newspaper company.
Karl has a small farm with a net income of $69,000. He also earns $88,000 before taxes from his off-farm job at a newspaper company. While Federal Insurance Contributions (FICA) or payroll Taxes are withheld on his salaried income is withheld by his employer, Karl still has to pay self-employment taxes on his farm income. 92.35% of net farm income is subject to self-employment taxes. A 12.4% rate applies to the first $142,800 of his total taxable income for social security and a 2.9% rate applies to all taxable income for Medicare.
i. How much of Karl's farm income is taxed for Social Security?
ii. Calculate the total payroll taxes that Karl will pay on his farm income?
iii. The IRS allows tax payers to claim and income tax deduction equal to 50% of self-employment taxes paid. Calculate the deduction that Karl can claim
iv. For high income earners, there is an additional Medicare tax of 0.9% that applies to income above $250,000. By how much can Karl's farm income increase before the additional Medicare tax would apply?
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