Tax Lesson 20 - Self-Employment Income and Tax

In this tax topic you will learn the federal tax laws that apply to small business sole proprietors and to statutory employees. Here, you will be introduced to business income, business expenses and certain business tax credits to use in filing your business return. How do you know when you are self-employed? You are self-employed if you carry on a trade or business as a sole proprietor or as an independent contractor. In addition, in this topic you will be introduced to self-employment (SE) tax and you will learn how to figure the SE tax.

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Student instructions:

Print this page, work on the questions and then submit test by mailing the answer sheet or by completing quiz online.

Instructions to submit quiz online successfully: Step-by-Step check list

Answer Sheet            Quiz Online

You may need acrobat reader to download forms and publications online.

Use IRS Publication 334, Schedule F instructions to complete this topic.

Please complete a return for Olive Brown.

Prepare  Form 1040, Schedule C , Schedule SE, Form 4562. 

Olive is a 27 year old unmarried taxpayer.

She owns and manages Fashions At Discount (Activity codes). A Clothing store that she started in 2008.

Address for business is 2304 Cobbs Ford Rd, Selma, AL 36701.

She had the following for her store:

Income Statement

Year Ended December 31, 2008

bullet Gross receipts............................................$400,000
bullet Minus: Returns and allowances...........................14,940
bullet Net receipts...............................................$385,060
bullet Minus: Cost of goods sold................................288,140
bullet Gross profit................................................$96,920
bullet                                                                             ========

Cost of Goods Sold

bullet Inventory at beginning of year.........................$37,845
bullet Plus: Purchases...........................$285,900
bullet Minus: Items withdrawn personal  ........2,650..= $283,250
bullet Goods available for sale...............................$321,095
bullet Minus: Inventory at end of year........................32,955
bullet Cost of goods sold......................................$288,140
bullet                                                                            ========

Expenses:
bulletBank service charges........................................150.00
bulletInsurance.....................................................270.00
bulletInterest paid for business loan..........................2,500.00
bulletProfessional services.......................................400.00
bulletRent........................................................12,000.00
bulletRepairs and Maintenance...................................860.00
bulletSupplies......................................................1,200.00
bulletAdvertising................................................4,000.00
bulletTaxes and licenses.........................................5,000.00
bulletUtilities (including telephone)...........................3,500.00
bulletWages......................................................59,050.00
bulletChamber of Commerce......................................120.00
bulletWindow washing..............................................190.00
bulletDepreciation for Store equipment (cash register, etc)..$834.00 (enter on line 17 of Form 4562)

Inventory is valued at cost and there was no change in determining inventory at any time during the year.

In addition, Olive had the following:

bullet Interest income from First Bank..............$490.00
bullet Health insurance paid for herself............$2,400.00 (Plan established under the business and she does not have any insurance at her work).

Olive paid rent all year in 2008. Use W2 for basic information. Address and other information on W2 is current.

Answer the following questions as accurately as possible.

 

1. Look at the Form 1040 you prepared for Olive Brown. What is the amount on Form 1040, Line 37?

A. $ 18,806.
B. $ 21,206.
C. $ 19,290. 
D. $ 21,690.

2. Look at the Form 1040 you prepared for Olive Brown. What is the amount on Form 1040, Line 73a?

A. $ 0.
B. $ 1,533.
C. $ 453. 
D. $ 1,420.

3. You generally must file an income tax return for the year 2008 if your net earnings from self-employment is ____ or more.

A. $ 600.
 B. $ 400.
 C. $ 300.
D. $ 100.

4. Self-employment tax (SE tax) is a Social security and Medicare tax primarily for individuals who

A. Are retired
 B. Work for an employer
 C. Work for themselves
 D. Are disabled.

5. If you and you spouse jointly own and operate an unincorporated business and share in the profits and losses, you are partners in a partnership, whether or not you have a formal partnership agreement. If you and your wife live in a community property state, you can

A. Use Schedule C or C-EZ.
 B. File Form 1065.
 C. Treat the business either as a sole proprietorship or a partnership.
D. All of the above

6. If you have employees, you will need to file forms to report employment taxes. Employment taxes include

A. Social security and Medicare taxes.
 B. Federal income tax withholding.
 C. Federal unemployment (FUTA) tax.
 D. All of the above.

7. When you pay out or receive certain payments in your business, you may have to report them to the IRS on information returns. The IRS compares the payments shown on the information returns with each person's income tax return to see if the payments were included in income. Use Form 1099-Misc., to report certain payments you make in your business, such as

A. Payments of $600 or more for services performed for your business by people not treated as your employees.
B. Rent payments of $600 or more
 C. Prizes and awards of $600 or more that are not for services, such as winnings on TV or radio shows.
 D. Any of the above

8. Use Form 1099-Misc., to report your sales of consumer goods to a person for resale anywhere other than in a permanent retail establishment for the amount of

A. $ 600 or more
 B. $ 400 or more
 C. $ 5,000 or more
 D. $3,000 or more

9. The annual accounting period for your income tax return is called a tax year. You can use which of the following tax year (s)?

A. A calendar tax year.
 B. A fiscal tax year.
 C. An adopted tax year.
 D. Both A and B are correct.

10. You are a self-employed lawyer. You perform legal services for a client, a small corporation. In payment for your services, you receive shares of stock in the corporation. You

A. Must include the fair market value of the shares in income.
B. Cannot include the fair market value of the shares in income.
 C. Don't have to report your shares since they have no cash liquid value.
 D. None of the above.

11. A calendar year is 12 consecutive months beginning January 1 and ending December 31. You must adopt the calendar tax year if

A. You keep no records.
 B. You have no annual accounting period.
 C. Your present tax year does not qualify as a fiscal year.
D. Any of the above.

12. You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business.  You can use the cash method, the accrual method, special methods, or a combination method using elements of two or more methods. Whichever method you use, it has to be a method that

A. Is used to figure personal items.
B. Is special method of accounting for certain items of income and expenses.
 C. Clearly shows all of your expenses.
D. Clearly shows your income.

13. Under this method of accounting, you include in your gross income all items of income you actually receive and deduct expenses in tax year in which you actually pay them.

A. Hybrid method.
B. Accrual method.
 C. Cash method. 
D. Special method.

14. Under this method of accounting, you include income in gross income in the year earned and deduct expenses in the year incurred. The purpose is to match income and expenses in the correct year.

A. Hybrid method.
B. Accrual method.
 C. Cash method. 
D. Special method.

15.  You use the cash method of accounting. You receive a valid check by the end of tax year 2008. With all the holiday shopping and celebrations, you did not have time to cash or deposit the check until tax year 2009. What tax year is this money for?

A. You report money as received in tax year 2008.
 B. You report money as received in tax year 2009.
C. You can choose to report your money in 2008 or 2009 because you received it towards the end of the year.
 D. The check was valid but since you were not able to cash it until 2009, you report the money for tax year 2009.

16. An amount of income is credited to your bank account or is made available to you without restriction. You do not need to have possession of it. If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. This is called

A. Restriction receipt.
 B. Cash receipt.
 C. Constructive receipt.
 D. Instant receipt.

17.  If you are self employed as a sole proprietor or are an employee who received a 1099-misc instead of a W-2 or you are considered an independent contractor, use Schedule C or C-EZ (Form 1040) to figure your earning subject to SE tax. You must pay self-employment tax and file Schedule SE (Form 1040) if your net earnings from self-employment were

A. $600.00 or more.
 B. $400.00 or more.
 C. $1,000.00 or more.
 D. None of the above.

18. Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. However, if you are a qualifying small business taxpayer you can use the cash method of accounting even if you produce, purchase or sell merchandise. You are a qualifying small business taxpayer only if in 3 years your average annual gross receipts were

A. More than $1,000 but less than $1,000,000.
B. Less than $1,000,000.
C. More than $1,000,000 but less than $10,000,000.
 D. Less than $100,000.

19. In some cases, money or property received is not income. The following is an example of an item that is not income.

A. Loans.
B. Sales tax.
C. Consignments.
 D. All of the above.

20. If there is a connection between any income you receive and your business and it is clear that the payment of income would not have been made if you did not have the business, then

A. The income is business income.
 B. The income is not business income.
C. The income is not taxable.
 D. The income needs to be capitalized.

 

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Revised: 05/21/10