Accredited Wealth Management Advisor Practice Exam

Which types of income received by an individual taxpayer are subject to the self-employment tax?

1. Net income from a real estate rental

2. Investment income from a general partnership

3. Net income from a sole proprietorship

4. Flow-through of income from an S corporation

The correct answer is: Investment income from a general partnership

The correct answer is net income from a sole proprietorship. This income is subject to self-employment tax because individuals operating a sole proprietorship are considered self-employed. As such, they are responsible for paying self-employment tax on their net earnings from the business. In contrast, net income from real estate rental is generally not subject to self-employment tax as it is classified as passive income, unless the taxpayer is a real estate dealer and their rental activities are substantial enough to be considered a trade or business. Investment income from a general partnership could also be passive income depending on the level of involvement or participation of the individual in the partnership. Flow-through income from an S corporation, while it may be subject to income tax, is not typically subject to self-employment tax for shareholders unless they are also employees of the S corporation receiving compensation for services rendered. Thus, self-employment tax broadly applies only to income generated through self-employment activities, which is distinctly categorized with the income derived from a sole proprietorship.