Self-Employment Deduction Calculation

Course: Income Tax Planning
Lesson 7: Arriving at Adjusted Gross Income

Student Question:

Dan, can you help me with the below question? While I know a self-employed person can reduce AGI by 50%, I still couldn’t seem to come up with an answer that matched any of the choices.


Scott is a self-employed financial planner who operates on a cash basis. In the current year, he had the following transactions: $130,000 receipts; $5,000 rent expense; $4,000 utilities; $6,000 reference materials. Based on this information, what is Scott’s self-employment tax deduction for Adjusted Gross Income? Note that his earnings from self-employment are below the maximum Social Security Taxable Wage Base.

Instructor Response:

Hey Paul.  Happy to help.  Self-employment taxes and deductions can be tricky.

The correct answer here is $8,125.  Self-employed individuals can reduce AGI by 1/2 self-employment taxes.  Starting with income, we reduce $130,000 by rent, utilities, and reference materials, and that gives us $115,000.  So, $115,000 x .9235 x .153 = $16,250.  Then half is $8,125.

Let me know if you have any other questions!