Compute Mike's estimated tax payment for the fourth quarter. He is self-employed and he expects to earn $20,640 this year. His estimated income tax rate is 18%. For self-employed persons, social security tax is 12.4% of wages up to $106,800, and Medicare tax is 2.9% of all wages
To compute Mike's estimated tax payment for the fourth quarter, we need to consider both income tax and self-employment taxes (social security tax and Medicare tax).
First, let's determine the income tax. Mike's estimated income tax rate is 18% of his expected earnings for the year, which is $20,640. To calculate the income tax amount, multiply the earnings by the tax rate:
Income tax = $20,640 * 0.18 = $3,715.20
Next, let's calculate the self-employment taxes. Self-employment tax consists of the social security tax and Medicare tax. The social security tax is applied to wages up to $106,800 at a rate of 12.4%. Since Mike's projected earnings are $20,640, we need to find the applicable portion of his wages for social security tax. If his earnings exceed $106,800, we will use the maximum cutoff of $106,800.
Social security tax = $20,640 * 0.124 (rate) = $2,560.16
Medicare tax is a flat rate of 2.9% applied to all of Mike's wages:
Medicare tax = $20,640 * 0.029 (rate) = $599.76
Now, we can calculate Mike's estimated tax payment for the fourth quarter by adding the income tax and the self-employment taxes:
Estimated tax payment = Income tax + Social security tax + Medicare tax
Estimated tax payment = $3,715.20 + $2,560.16 + $599.76 = $6,875.12
Therefore, Mike's estimated tax payment for the fourth quarter is $6,875.12.