Which types of income are subject to the self-employment tax?

Which types of income are subject to the self-employment tax?

• A. Net income from a real estate rental
• B. Investment income from a general partnership
• C. Net income from a sole proprietorship
• D. Flow-through of income from an S corporation

Answer: (C)

Net income from a sole proprietorship is subject to self-employment tax because individuals operating as sole proprietors are considered self-employed. Self-employment tax consists of Social Security and Medicare taxes primarily for those who work for themselves. The net earnings from the business activities that a sole proprietor conducts are reported on Schedule C of their personal tax return, and if the net income exceeds a specific threshold, it is subject to self-employment tax. Income from a real estate rental typically does not qualify as self-employment income unless the rental activity is classified as a business rather than a passive investment. Investment income from a general partnership and flow-through income from an S corporation are also not subject to self-employment tax; instead, they may be taxed in other ways, such as at the individual owner's tax rate without the additional self-employment tax implications.

Net income from a sole proprietorship is subject to self-employment tax because individuals operating as sole proprietors are considered self-employed. Self-employment tax consists of Social Security and Medicare taxes primarily for those who work for themselves. The net earnings from the business activities that a sole proprietor conducts are reported on Schedule C of their personal tax return, and if the net income exceeds a specific threshold, it is subject to self-employment tax.

Income from a real estate rental typically does not qualify as self-employment income unless the rental activity is classified as a business rather than a passive investment. Investment income from a general partnership and flow-through income from an S corporation are also not subject to self-employment tax; instead, they may be taxed in other ways, such as at the individual owner's tax rate without the additional self-employment tax implications.