ACCY 312 Chap.7 AMT, Net Investment Income and Employment Taxes
AMT, Net Investment Income and Employment Taxes
The alternative minimum tax as a second computation
The alternative minimum tax exists to make sure taxpayers pay some minimum level of tax. The taxpayer computes the regular tax and also a tax on a broader alternative base, at 26% or 28% on ordinary income and at 0%, 15% or 20% on qualified dividends and long-term gains. AMT is owed only when the tax on the alternative base is higher than the regular tax.
The course treats it conceptually: the taxpayers most likely to pay are those with large capital gains or large itemized deductions.
Unlike the other taxes in this chapter, AMT is measured against the regular tax rather than added independently.
The net investment income tax
A 3.8% tax applies to the lesser of net investment income and the amount by which modified AGI exceeds a threshold: $250,000 for joint filers, $125,000 for married filing separately and $200,000 for everyone else.
Net investment income includes rents, royalties, interest, dividends, annuities, passive income and net gains on property, less related deductions. Modified AGI is usually just AGI.
Employment taxes on wages
Employees and employers each pay 6.2% social security tax on wages up to $184,500 for 2026 and 1.45% Medicare tax on all wages.
An additional Medicare tax of 0.9% applies to wages and self-employment earnings above $200,000 for a single filer, $250,000 for a joint return and $125,000 for married filing separately.
For married couples, social security and regular Medicare are assessed on each spouse separately, but the additional Medicare threshold applies to their combined earnings.
Self-employment tax
A self-employed taxpayer pays both halves. Net earnings from self-employment are Schedule C profit times 92.35%, which removes half of the 15.3% combined rate.
Social security at 12.4% applies up to whatever remains of the $184,500 base after any wages, Medicare at 2.9% applies to all net earnings, and the 0.9% additional tax applies above the filing-status threshold.
The employer-equivalent half of regular self-employment tax is then a deduction for AGI.
Employee or independent contractor
Classification turns on control: who decides how, when and where the work is done. It changes who pays the payroll taxes and which expenses are deductible, which is why disputes over gig workers attract so much attention.
What this chapter covers
- 01
Alternative minimum tax as a parallel computation
- 02
Net investment income tax at 3.8%
- 03
Social security and Medicare taxes
- 04
Additional Medicare tax thresholds
- 05
Net earnings from self-employment at 92.35%
- 06
Employee versus independent contractor
Worked example · free
Payroll taxes for an employee with a side business
- 2Wages: social security $150,000 x 6.2% = $9,300; Medicare $150,000 x 1.45% = $2,175.
- 2Net earnings: $60,000 x 92.35% = $55,410; remaining wage base $184,500 less $150,000 = $34,500.
- 2SE tax: $34,500 x 12.4% = $4,278 plus $55,410 x 2.9% = $1,606.89.
- 2Additional Medicare: ($150,000 + $55,410 less $200,000) x 0.9% = $48.69; total $17,408.58.
Key terms
- Alternative Minimum Tax
- A tax on a broader base that is paid only to the extent it exceeds the regular tax.
- Net Investment Income Tax
- A 3.8% tax on the lesser of net investment income and modified AGI above a threshold.
- Modified AGI
- AGI with limited adjustments, used to test the net investment income tax threshold.
- FICA Taxes
- The social security and Medicare taxes withheld from wages and matched by the employer.
- Additional Medicare Tax
- A 0.9% tax on wages and self-employment earnings above the filing-status threshold.
- Net Earnings from Self-Employment
- Schedule C net profit multiplied by 92.35%, the base for self-employment tax.
- Independent Contractor
- A worker who controls how, when and where the work is done and pays self-employment tax.
AMT, Net Investment Income and Employment Taxes FAQ
Who is most likely to owe the alternative minimum tax?
The slides point to taxpayers with large capital gains or large itemized deductions. Their broader alternative base can produce a tax above the regular tax, and only that excess is payable as AMT.
Why is self-employment income multiplied by 92.35%?
An employer deducts its half of payroll tax, so the self-employed base is reduced by half of the 15.3% combined rate. Multiplying profit by 92.35% treats the self-employed person like an employer paying that half.
Do married couples combine wages for the social security cap?
No. Social security and regular Medicare are assessed on each spouse's wages separately. The additional Medicare tax is the exception, because its threshold is tested against the couple's combined earnings.
Exam move
Write each tax in this chapter as a pair: its base and its rate. Then solve one mixed wages-plus-business case slowly, labelling which base each number reduces, before timing yourself on a second.
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