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Issue 2. Self-Employment Tax
In the notice of deficiency issued to petitioner Paul I.
Yoshihara, respondent determined that he was liable for self-
employment tax on the unreported income from landscaping
services. Section 1401 imposes a tax on the self-employment
income of every individual. An individual's self-employment
income depends on his "net earnings from self-employment". Sec.
1402(b). In relevant part, the term "net earnings from self-
employment" means the gross income derived by an individual from
any trade or business carried on by such individual less
allowable deductions attributable to such trade or business. See
sec. 1402(a). Under section 1402(a)(5), where the income from a
trade or business is community income, as in this case, all of
the gross income and deductions attributable to such trade or
business shall be treated as the gross income and deductions of
the husband, unless the wife exercises substantially all of the
management and control of the trade or business, in which case
all such gross income and deductions shall be treated as hers.
Accordingly, under section 1401, the spouse deemed to have
management and control of the business activity is subject to
self-employment tax, and the tax is computed on the total gross
income less the total deductions of the business, notwithstanding
the attribution of one-half of the income to the other spouse for
income tax purposes.
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Last modified: May 25, 2011