Which statement regarding self-employment taxes is true?

• A. Net earnings must be calculated under the cash method.
• B. Self-employment tax discourages entrepreneurship.
• C. There is no self-employment tax once the wage base is exceeded.
• D. One-half of self-employment tax liability can be deducted from income.

Answer: (D)

The statement regarding self-employment taxes that is true is that one-half of self-employment tax liability can be deducted from income. This deduction effectively reduces the overall taxable income for self-employed individuals, which can provide significant tax relief.

Specifically, self-employed individuals are subject to self-employment tax, which covers Social Security and Medicare taxes for those who work for themselves. The total amount of self-employment tax is calculated based on net earnings, but only half of that amount is allowed as a deduction when calculating adjusted gross income. This is important because it can lower the overall tax burden associated with self-employment.

In contrast, net earnings do not need to be calculated exclusively under the cash method; they can also be determined using the accrual method. Additionally, while some may feel that self-employment tax discourages entrepreneurship, it is an essential part of funding social insurance programs rather than a direct deterrent. Finally, it is not accurate to say there is no self-employment tax once the wage base is exceeded; self-employment taxes are applied to net earnings, not wages, and they continue to apply until certain income thresholds are reached, thus influencing the overall tax planning strategy for self-employed individuals.