Final answer:
Jacob's total tax liability on the $100,000 business income allocation from the LLC would be $40,800 if the income is not QBI and $33,400 if it is QBI assuming he qualifies for the full 20% deduction. Calculations include income tax, self-employment tax, and additional Medicare tax.
Step-by-step explanation:
When calculating the taxes on business income for a self-employed individual such as Jacob, we consider several different types of taxes. In the scenario where the income is not qualified business income (QBI), Jacob would owe income tax based on his marginal rate as well as self-employment tax, which includes the Social Security and Medicare components.
- The income tax on $100,000 at a marginal rate of 37% would be $37,000.
- Self-employment tax is calculated as 2.9% for Medicare, which amounts to $2,900.
- The additional Medicare tax of 0.9% on the $100,000 would be $900.
Therefore, if the income is not QBI, the total tax would be the sum of the income tax, self-employment tax, and additional Medicare tax: $37,000 + $2,900 + $900 = $40,800.
If the $100,000 is considered Qualified Business Income and Jacob qualifies for the full QBI deduction (20%), the calculation would change. With the QBI deduction, only 80% of the business income would be subject to income tax. Here's the math for scenario B:
- QBI deduction: 20% of $100,000 = $20,000, reducing taxable income to $80,000.
- Income tax on $80,000 at a 37% marginal rate would be $29,600.
- Self-employment tax (2.9%) on $100,000 remains at $2,900, as it is calculated on the full amount.
- The additional Medicare tax (0.9%) also remains at $900.
In this case, the total tax Jacob would owe with the QBI deduction would be $29,600 + $2,900 + $900 = $33,400.