Question

How much of a self-employed taxpayer's self-employment tax may be deducted for AGI?

A) All of the self-employment tax is deductible.
B) The employer portion of self-employment tax is deductible.
C) Self-employment tax is deductible to the extent of the self-employment income.
D) None of self-employment tax is deductible.

Answer 1

A self-employed taxpayer can deduct the employer-equivalent portion of self-employment tax, which is 7.65% of net earnings, when calculating Adjusted Gross Income (AGI).

Step-by-step explanation:

The portion of a self-employed taxpayer's self-employment tax that may be deducted for Adjusted Gross Income (AGI) is the employer-equivalent portion. Therefore, the correct answer is B) The employer portion of self-employment tax is deductible. When you are self-employed, you are responsible for paying both the employee and the employer side of Social Security and Medicare taxes, which is collectively known as the self-employment tax. However, for taxation purposes, you can deduct the employer-equivalent portion of your self-employment tax when calculating your AGI. This deduction effectively halves the self-employment tax burden in terms of its impact on your income tax liability.

Self-employment tax is calculated as a percentage of your net earnings from self-employment, with the total rate being 15.3%—12.4% for Social Security and 2.9% for Medicare. The deduction for AGI is allowed for the employer portion, which is 7.65% (half of the 15.3%).