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Tax Topic 14 - 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

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Use IRS Publication 334, Schedule F instructions, Form 8882 instructions, Form 5884 instructions, Form 3468 instructions and Form 8826 (instructions), and Form 1040 Instructions (Form 1040 instructions only up to page 98) to complete this tax topic.

Please note: Form 1040 Instructions (Form 1040 instructions only up to page 98) will be used for the rest of the topics in the initial tax preparer certification course. You will be responsible to answer questions from the Form 1040 instructions booklet (up to page 98) on every topic so read it carefully.

Tax Return Situation 1:

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). This is a clothing store she started in 2011.

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

She had the following for her store:

Income Statement

Year Ended December 31, 2011
Gross receipts $400,000
Minus: Returns and allowances   14,940
Net receipts  385,060
Minus: Cost of goods sold  288,140
Gross profit   96,920
                                                                            ========

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Minus: Items withdrawn personal   2,650        (285,900-2,650=$283,250)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

Expenses:
Bank service charges 150.00
Insurance 270.00
Interest paid for business loan 2,500.00
Professional services 400.00
Rent 12,000.00
Repairs and Maintenance 860.00
Supplies 1,200.00
Advertising 4,000.00
Taxes and licenses 5,000.00
Utilities (including telephone) 3,500.00
Wages 59,050.00
Chamber of Commerce 120.00
Window washing 190.00
Depreciation 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:
Interest income from First Bank $490.00
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 2011. Use W2 for basic information. Address and other information on W2 is current.

 
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Revised: 11/13/18