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1.8: A Taxing Set of Problems

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INTRODUCTION

Let's review some of the terms defined in Preparation 1.7. Please make sure you understand these terms as they will be referred to throughout this collaboration.

Revenue: This is the amount of money that a business receives when it sells a product or service.

Net profit: The net profit is the actual amount of money a business makes after expenses. Expenses are something a person or people spend money on. The expression for this is:

Net profit = Revenue − Expenses

Example: A restaurant might charge a customer $10 for a meal, but it cost the restaurant $4 for the food, $1 for the waiter’s paycheck, and $1 for the building. You need to add up all the restaurant’s expenses ($4 + $1 + $1 = $6). Then you subtract it from the total amount they make ($10) to figure out the net profit. The expression would be 10 – (4 + 1 + 1) = 4. The restaurant’s net profit is $4.

Net loss: A net loss is similar to net profit, but a business has a net loss if the net profit is a negative number.

Example: If the restaurant’s expenses were higher than the revenue, they would have a net loss. They could pay the waiter more ($5) and the building could cost more ($3). The expression would be 10 – (4 + 5 + 3) = −2. The restaurant’s net loss is $2.

FICA: This is an acronym for "Federal Insurance Contributions Act." FICA tax is the money that is taken out of workers' paychecks to pay older Americans their Social Security retirement and Medicare (Hospital Insurance) benefits. It is a mandatory payroll deduction.

Quick Check-in:

Please discuss the following questions with your group:

What specific concept from the last unit do you feel fairly confident about?
Are there any concepts from the last unit that you find challenging?

SPECIFIC OBJECTIVES

By the end of this collaboration, you should understand that

the order of operations is needed to communicate mathematical expressions to others.

By the end of this collaboration, you should be able to

perform multistep calculations using information from a real-world source.
rewrite multistep calculations as a single expression.
explain the meaning of a calculation within a context.

PROBLEM SITUATION: FICA TAXES

The United States government requires that businesses pay into two national insurance programs—Social Security and Medicare—which help senior citizens pay for their personal expenses (things that a person or people spend money on) and health care. Businesses take money out of their employees’ paychecks in order to pay the government. In other words, if you work for a business, your employer deducts Social Security and Medicare taxes from your paycheck. Also, the business pays a portion of the taxes for you. These taxes are called Federal Insurance Contributions Act (FICA) taxes.

People who own their own businesses are self-employed. They have to pay their own taxes. This
is called the self-employment tax. In this problem situation, you will calculate how much three self-employed individuals owe in self-employment tax. You will do this by using a tax worksheet called the Schedule SE. This is an Internal Revenue Service (IRS) tax form. The IRS is the part of the government that collects taxes. It has many different types of forms that help individuals figure out how much they owe in taxes.

(1) Below is a copy of a blank Schedule SE.²³ Recall that you saw this in Preparation 1.7, which also included some important vocabulary words and examples that can help you answer this question.

Marianne Lopez has a part-time job as a math tutor. She offers tutoring services to students both in person and online. Last year, she earned $11,385 in revenue, or the amount of money she received from selling her service. Her expenses totaled $3,862. You are going to calculate how much self-employment tax Marianne owes. That is, you are going to determine what value should be put into the cell on line 5. Take a moment to do this on your own before sharing your calculations in your group.

Note: Marianne does not have a farm, and she does not receive social security retirement or disability benefits. She is also not a minister or a member of a religious order and does not have other income. You do not need to know which schedule or form Marianne’s net profit (the actual amount of money made after expenses) comes from. These cells have been zeroed out to avoid confusion. You also do not need to calculate line 13.

(a) What value should be put into the cell on line 2?

(b) What value should be put into the cell on line 3?

(d) What value should be put into the cell on line 6? Write answer to two decimal places.

(e) What value should be put into the cell on line 9?

(f) What value should be put into the cell on line 10? Round your answer to two decimal places.

(g) What value should be put into the cell on line 11? Round your answer to two decimal places.

(h) What value should be put into the cell on line 12? Round your answer to two decimal places.

(2) Leigh Olson started a small bakery last year. She has no income to report on line 1a or line 1b. She earned $1,050 in revenue selling cookies and cupcakes. Her expenses totaled $630. In your group, work through the questions below to figure out how much self-employment tax Leigh Olson owes.

Note: Leigh does not have a farm, and she does not receive social security retirement or disability benefits. She is also not a minister or a member of a religious order. You do not need to know which schedule or form Leigh’s net profit comes from. These cells have been zeroed out to avoid confusion. You also do not need to calculate line 13.

(a) What value should be put into the cell on line 2?

(b) What value should be put into the cell on line 3?

(d) How much tax does Leigh owe? Be careful here!

(3) In Question 1, you learned about Marianne Lopez. You used the Schedule SE form to calculate how much self-employment tax Marianne owes. Now, write the calculation you completed to answer Question 1 as a single expression. An example of a single expression is shown below.

Example: The following calculations,

19 - 4 = 15

5.75*15 = 86.25

0.3*86.25 = 25.875

Can be written as a single expression: 0.3(5.75)(19 - 4) = 25.875

(4) Look back at your single expression from Question 3. Imagine you have to explain the expression to Marianne to help her understand how you calculated the amount of self-employment tax that she owes. Answer these questions about the expression:

(a) What does the operation $11,385 − $3,862 represent for Marianne?

(b) What does the operation of multiplying by 0.9235 represent for Marianne?

Self-Employment and the Medicare Tax

The Affordable Care Act was passed by Congress and signed into law in 2010. The law reforms the health care system in the United States by protecting consumers from losing their health insurance, bringing down insurance costs, expanding access to health care services, strengthening Medicare with added benefits, and improving the quality of health care for Medicare patients. Medicare is a federal (government-run) health insurance program for seniors, people who are 65 and older, in the United States. All taxpayers pay into the Medicare program.

In order to raise revenue to support the expansion of care under the Affordable Care Act, the U.S. government created an additional Medicare tax for individuals with higher incomes. People who are self-employed use Part II of Form 8959 to determine how much additional Medicare tax they have to pay (if any).²⁴ Only individuals and couples with incomes over certain amounts have to pay this tax. These amounts appear in line 9 of Form 8959.

Screen capture showing Part II - Additional Medicare Tax on Self-Employment Income, indicating the following values: 8 = $215,500 9 = $200,000 10 = $0 11 = $200,000

(5) Andie Henson is a single, self-employed psychiatrist. Her self-employment income from Schedule SE (Form 1040) Section A was $215,500. She did not earn wages from another job during this year. This information has already been entered in lines 8–11 of Form 8959. Use mental math to find the exact value of line 12 and add it to the form. Then, estimate the value of line 13 and record your estimate in the space below. Do not use a pencil and paper or a calculator. Briefly explain your estimation strategy.

(6) Now, calculate the Additional Medicare Tax that Andie owes (line 13). How does the calculation compare to your estimate in Question 5?

FURTHER APPLICATIONS

(7) Workers in the United States pay several types of taxes on income. This collaboration discussed the FICA tax. You also have to pay federal income tax. Your federal income tax rate is based on the amount of money you make. Income is broken into levels called tax brackets. The table below shows the tax brackets for 2021.²⁵

Taxable Income	Tax
$0–$9,950	10% of taxable income
$9,951–$40,525	$995.00 plus 12% of excess over $9,950
$40,526–$86,375	$4,664.00 plus 22% of excess over $40,525
$86,376–$164,925	$14,751.00 plus 24% of excess over $86,375
$164,926–$209,425	$33,603.00 plus 32% of excess over $164,925
$209,426–$523,600	$47,843.00 plus 35% of excess over $209,425
$523,601 and up	$157,804.25 plus 37% of excess over $523,600

(a) Write a single expression that you can use to calculate the income tax for a person with taxable income of $63,500.

(b) The $4,664.00 in the third line of the table is based on information from the previous two lines. Explain how the $4,664.00 is calculated. Hint: Start by thinking about where the $995.00 in line 2 came from.

MAKING CONNECTIONS

Record the important mathematical ideas from the discussion.

_________________________________

²³ https://www.irs.gov/pub/irs-prior/f1040sse--2021.pdf

²⁴ https://www.irs.gov/forms-pubs/about-form-8959

²⁵ https://taxfoundation.org/2021-tax-brackets/

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