Chapter 7

Chapter 7 - 125 Chapter 7 Self-Employment Highlights of...

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© 2010 CCH. All Rights Reserved. Chapter 7 125 Chapter 7 Self-Employment Highlights of 2010 Tax Changes The standard mileage rate for deducting business use of a vehicle is $.50 per mile in 2010 (down from $.55 in 2009). The depreciation component built into the standard mileage rate for business miles driven during 2010 increased to $.24 per mile (from $.21 in 2009). In 2010, the 15.3% self-employment tax rate applies to the f rst $106,800 of net earnings from self- employment (same as in 2009). The 2.9% tax rate applies to net earnings from self-employment in excess of $106,800. For 2010, the maximum contribution to de f ned bene f t plans (including KEOGH and SEP plans) is the lesser of 25% of the participant’s compensation or $49,000 (same as in 2009). The annual limit for contributions to 401(k) plans is $16,500 in 2010. Employees age 50 and older can contribute an additional $5,500, for a total of $22,000 in 2010. These amounts are the same as in 2009. The annual limit for contributions to a SIMPLE plan is $11,500 in 2010 (same as in 2009). Employees age 50 and older can contribute an additional $2,500 in 2010 (same as in 2009). For 2010 only, net earnings from self-employment is 92.35% of (self-employment pro f ts - deduction for health insurance on Form 1040, page 1). Teaching Suggestions Chapter 7 focuses on the reporting requirements for self-employed individuals. In this chapter, students learn 1. how to calculate net pro f t (or loss) from a business operated as a sole proprietorship, as well as how to compute the self-employment tax. This chapter also covers the deduction for one-half of the self-employment tax and the deduction for contributions made to Keogh, SEP and SIMPLE retirement plans. It is important for students to realize that the net pro f t (loss) reported on Schedule C is not always the same as the net income (loss) reported on the “books” of the business. For example, charitable contributions deducted on the “books” of the business are not deducted on Schedule C, but instead must be deducted on Schedule A. Other items of income and expense that do not appear on Schedule C include casualty and theft losses of business property, and gains and losses on the sale of business property. Three forms and schedules are introduced in this chapter: Schedules C and SE, and Form 8829. Completing these forms requires a sequencing of calculations. This is especially the case for self-employed taxpayers deducting expenses for business use of the home. Before Form 8829 can be f lled out, Schedule C f rst must be completed through line 29, Tentative pro f t (loss). Once Form 8829 is completed, net pro f t (or loss) on Schedule C can be computed. Net pro f t (or loss) from Schedule C is then used to calculate self-employment tax on Schedule SE. Using net pro f t from Schedule C and the deduction for one-half of the self-employment tax on Schedule SE, the required contribution to the taxpayer’s retirement plan can be determined.
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This note was uploaded on 01/14/2012 for the course ECON 121 taught by Professor Mcdevitt during the Winter '10 term at UCLA.

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Chapter 7 - 125 Chapter 7 Self-Employment Highlights of...

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