Other Individual Taxes

Beyond the regular income tax, individuals may be subject to several additional taxes that the CPA exam tests separately. This chapter covers self-employment tax, the additional Medicare tax, the net investment income tax, the kiddie tax, and estimated tax requirements.

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Self-Employment Tax

Self-employment (SE) tax is the self-employed individual's equivalent of FICA taxes (Social Security and Medicare) that employers and employees split. A self-employed individual pays both halves.

Rate and Computation

Component	Rate	Wage Base (2025)
Social Security (OASDI)	12.4%	$176,100
Medicare (HI)	2.9%	No limit
Total	15.3%

The SE tax is computed on 92.35% of net self-employment earnings (Schedule C net profit). The 92.35% factor approximates the effect of the employer-equivalent portion that would reduce an employee's taxable wages.

$$\text{SE Tax} = \text{Net SE Earnings} \times 92.35\% \times 15.3\%$$

Deduction for Half of SE Tax

The taxpayer may deduct one-half of the self-employment tax as an adjustment to gross income (above the line on Schedule 1). This deduction reduces AGI but does not reduce the amount of SE earnings subject to SE tax.

Example

Jamie operates a consulting business as a sole proprietor and reports $120,000 of net profit on Schedule C.

Step 1 — Calculate SE income:

$$\$120{,}000 \times 92.35\% = \$110{,}820$$

Step 2 — Calculate SE tax:

$$\$110{,}820 \times 15.3\% = \$16{,}955$$

Step 3 — Deduction for half of SE tax:

$$\$16{,}955 \times 50\% = \$8{,}478$$

Jamie reports $16,955 as self-employment tax on Schedule SE and claims an $8,478 adjustment to gross income on Schedule 1.

tip

The Social Security portion (12.4%) applies only up to the wage base. If Jamie also has W-2 wages, those wages reduce the amount of SE income subject to the 12.4% Social Security tax. The Medicare portion (2.9%) has no wage base limit.

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Additional Medicare Tax

Beginning in 2013, an additional 0.9% Medicare tax applies to certain high-income taxpayers on wages and self-employment income exceeding a threshold amount.

Thresholds

Filing Status	Threshold
Married Filing Jointly	$250,000
Married Filing Separately	$125,000
All others (Single, HoH, QSS)	$200,000

Application

• Employees: The additional 0.9% is withheld by the employer on wages exceeding $200,000 (regardless of filing status). Any over- or under-withholding is reconciled on the employee's return.
• Self-employed: The additional 0.9% applies to SE income exceeding the threshold, after combining with any W-2 wages.
• No employer match: Unlike regular Medicare tax, the employer does not pay a matching 0.9%.

Example

Sarah earns $280,000 in W-2 wages and files as Single.

$$\text{Additional Medicare Tax} = (\$280{,}000 - \$200{,}000) \times 0.9\% = \$80{,}000 \times 0.9\% = \$720$$

Sarah's employer withholds the additional 0.9% on wages exceeding $200,000 throughout the year. The $720 is reported on Form 8959.

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Net Investment Income Tax (NIIT)

The net investment income tax (NIIT) imposes an additional 3.8% tax on the lesser of (1) net investment income or (2) the excess of modified AGI (MAGI) over the applicable threshold.

Thresholds

Filing Status	MAGI Threshold
Married Filing Jointly	$250,000
Married Filing Separately	$125,000
All others (Single, HoH, QSS)	$200,000

What Counts as Net Investment Income

Net investment income includes:

• Interest, dividends, annuities, royalties, and rents (portfolio income)
• Passive activity income (income from trade or business in which the taxpayer does not materially participate)
• Net capital gains (including gains from the sale of stocks, bonds, and investment real estate)

Net investment income does not include:

• Wages, salaries, and other compensation
• Self-employment income
• Social Security benefits
• Tax-exempt interest
• Distributions from qualified retirement plans (IRAs, 401(k)s)
• Income from an active trade or business (material participation)

Computation

$$\text{NIIT} = 3.8\% \times \min(\text{Net Investment Income},\ \text{MAGI} - \text{Threshold})$$

Example

Marcus and Priya are married filing jointly. Their MAGI is $310,000 and they have $45,000 of net investment income (dividends, capital gains, and rental income from a passive activity).

$$\text{Excess MAGI} = \$310{,}000 - \$250{,}000 = \$60{,}000$$ $$\text{NIIT} = 3.8\% \times \min(\$45{,}000,\ \$60{,}000) = 3.8\% \times \$45{,}000 = \$1{,}710$$

The NIIT is $1,710 because the net investment income ($45,000) is less than the excess MAGI ($60,000). Reported on Form 8960.

info

The NIIT is in addition to regular income tax and the additional Medicare tax. A high-income taxpayer with significant investment income could pay regular tax, plus the 3.8% NIIT on investment income, plus the 0.9% additional Medicare tax on earned income.

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Kiddie Tax

The kiddie tax rules prevent parents from shifting investment income to their children to take advantage of the child's lower tax bracket. Under these rules, a dependent child's net unearned income above a threshold is taxed at the parent's marginal rate.

Who Is Subject to the Kiddie Tax

The kiddie tax applies to a child who:

1. Has unearned income (interest, dividends, capital gains) exceeding the threshold
2. Is under age 19 at the end of the tax year, or is a full-time student under age 24
3. Does not file a joint return
4. Has at least one living parent

Computing the Kiddie Tax (2025)

Component	Amount
First $1,350 of unearned income	Offset by the child's standard deduction (tax-free)
Next $1,350 of unearned income	Taxed at the child's rate
Unearned income over $2,700	Taxed at the parent's marginal rate

The child's standard deduction for unearned income purposes is limited to the greater of $1,350 or earned income plus $450 (but not more than the regular standard deduction).

Example

Derek (age 16, claimed as a dependent) has no earned income and receives $5,700 of dividend and interest income in 2025.

Layer	Amount	Taxed At
First $1,350	$1,350	Tax-free (standard deduction)
Next $1,350	$1,350	Child's rate (10%)
Remaining $3,000	$3,000	Parent's marginal rate

If Derek's parents are in the 32% bracket, the $3,000 of net unearned income above $2,700 is taxed at 32% rather than the 10% that would otherwise apply.

caution

The kiddie tax applies to unearned income only. If a 17-year-old earns $8,000 from a summer job and has only $500 of interest income, the kiddie tax does not apply because unearned income is below the $2,700 threshold.

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Estimated Tax and Underpayment Penalty

Taxpayers who do not have sufficient withholding (e.g., self-employed individuals, investors) must make quarterly estimated tax payments to avoid an underpayment penalty.

Due Dates

Quarter	Income Period	Due Date
1st	Jan 1 – Mar 31	April 15
2nd	Apr 1 – May 31	June 15
3rd	Jun 1 – Aug 31	September 15
4th	Sep 1 – Dec 31	January 15 (following year)

When Estimated Payments Are Required

An underpayment penalty applies if the taxpayer owes $1,000 or more after subtracting withholding and refundable credits, unless a safe harbor is met.

Safe Harbor Rules

A taxpayer avoids the underpayment penalty if total payments (withholding + estimated payments) equal or exceed the lesser of:

Safe Harbor	Requirement
Current-year safe harbor	90% of the current year's tax liability
Prior-year safe harbor	100% of the prior year's tax liability
High-income prior-year safe harbor	110% of the prior year's tax liability (if prior-year AGI exceeds $150,000, or $75,000 MFS)

note

The prior-year safe harbor requires that a return was filed for the prior year. If the prior-year return shows zero tax liability, the taxpayer has no estimated payment requirement — but this only works if a return was actually filed for that year.

Penalty Calculation

The underpayment penalty is essentially interest on the underpaid amount for the period of underpayment. It is calculated separately for each quarter.

• The penalty rate is the federal short-term rate plus 3 percentage points, adjusted quarterly.
• The penalty is not deductible.

Example

Priya is self-employed and expects to owe $20,000 in federal income tax for 2025. Her prior-year tax liability was $18,000 (and her AGI was under $150,000). To avoid the underpayment penalty, Priya must pay the lesser of:

• 90% of 2025 tax: $20,000 × 90% = $18,000
• 100% of 2024 tax: $18,000

Either safe harbor requires $18,000 in total payments. Priya should make quarterly estimated payments of at least $4,500 ($18,000 ÷ 4) by each due date.

:::tip CPA Exam Strategy

When a question involves estimated taxes, check the safe harbors first. If total payments meet either the 90% current-year test or the 100%/110% prior-year test, there is no penalty — regardless of how much tax is ultimately owed.

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