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taxmap/instr/i1040sse-003.htm#TXMP0eaa1105 Net Earnings From Self-Employment

In most cases, net earnings include your net profit from a farm or nonfarm business. If you were a partner in a partnership, see the following instructions.

taxmap/instr/i1040sse-003.htm#TXMP6d771102 Partnership Income or Loss

If you were a general or limited partner in a partnership, include on line 1 or line 2, whichever applies, the amount of net earnings from self-employment from Schedule K-1 (Form 1065), box 14, code A, and Schedule K-1 (Form 1065-B), box 9, code J1. General partners should reduce this amount before entering it on Schedule SE by any section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties. If you reduce the amount you enter on Schedule SE, attach an explanation.

If a partner died and the partnership continued, include in SE income the deceased's distributive share of the partnership's ordinary income or loss through the end of the month in which he or she died. See section 1402(f).

If you were married and both you and your spouse were partners in a partnership, each of you must pay SE tax on your own share of the partnership income. Each of you must file a Schedule SE and report the partnership income or loss on Schedule E (Form 1040), Part II, for income tax purposes.

SE income belongs to the person who is the member of the partnership and cannot be treated as SE income by the nonmember spouse, even in community property states.

taxmap/instr/i1040sse-003.htm#TXMP151ee54e Share Farming

You are considered self-employed if you produced crops or livestock on someone else's land for a share of the crops or livestock produced (or a share of the proceeds from the sale of them). This applies even if you paid another person (an agent) to do the actual work or management for you. Report your net earnings for income tax purposes on Schedule F (Form 1040) and for SE tax purposes on Schedule SE. See Pub. 225 for details.

taxmap/instr/i1040sse-003.htm#TXMP56e3f6b7 Other Income and Losses Included in Net Earnings From Self-Employment

1. Rental income from a farm if, as landlord, you materially participated in the production or management of the production of farm products on this land. This income is farm earnings. To determine whether you materially participated in farm management or production, do not consider the activities of any agent who acted for you. The material participation tests are explained in chapter 12 of Pub. 225.
2. Cash or a payment-in-kind from the Department of Agriculture for participating in a land diversion program.
3. Payments for the use of rooms or other space when you also provided substantial services. Examples are hotel rooms, boarding houses, tourist camps or homes, parking lots, warehouses, and storage garages.
4. Income from the retail sale of newspapers and magazines if you were age 18 or older and kept the profits.
5. Income you receive as a direct seller. Newspaper carriers or distributors of any age are direct sellers if certain conditions apply. See chapter 5 of Pub. 334 for details.
6. Amounts received by current or former self-employed insurance agents and salespersons that are:
   1. Paid after retirement but figured as a percentage of commissions received from the paying company before retirement,
   2. Renewal commissions, or
   3. Deferred commissions paid after retirement for sales made before retirement.

      However, certain termination payments received by former insurance salespersons are not included in net earnings from self-employment (as explained in item 9 under Income and Losses Not Included in Net Earnings From Self-Employment on this page).

7. Income of certain crew members of fishing vessels with crews of normally fewer than 10 people. See chapter 10 of Pub. 334 for details.
8. Fees as a state or local government employee if you were paid only on a fee basis and the job was not covered under a federal-state social security coverage agreement.
9. Interest received in the course of any trade or business, such as interest on notes or accounts receivable.
10. Fees and other payments received by you for services as a director of a corporation.
11. Recapture amounts under sections 179 and 280F that you included in gross income because the business use of the property dropped to 50% or less. Do not include amounts you recaptured on the disposition of property. See Form 4797.
12. Fees you received as a professional fiduciary. This may also apply to fees paid to you as a nonprofessional fiduciary if the fees relate to active participation in the operation of the estate's business, or the management of an estate that required extensive management activities over a long period of time.
13. Gain or loss from section 1256 contracts or related property by an options or commodities dealer in the normal course of dealing in or trading section 1256 contracts.

taxmap/instr/i1040sse-003.htm#TXMP7c4149b5 Income and Losses Not Included in Net Earnings From Self-Employment

1. Salaries, fees, etc., subject to social security or Medicare tax that you received for performing services as an employee, including services performed as a public official (except as a fee basis government employee as explained in item 8 under ) or as an employee or employee representative under the railroad retirement system.
2. Fees received for services performed as a notary public. If you had no other income subject to SE tax, enter Exempt—Notary on Form 1040, line 58; do not file Schedule SE. However, if you had other earnings of $400 or more subject to SE tax, enter Exempt—Notary and the amount of your net profit as a notary public from Schedule C or Schedule C-EZ on the dotted line to the left of Schedule SE, line 3. Subtract that amount from the total of lines 1 and 2 and enter the result on line 3.
3. Income you received as a retired partner under a written partnership plan that provides for lifelong periodic retirement payments if you had no other interest in the partnership and did not perform services for it during the year.
4. Income from real estate rentals if you did not receive the income in the course of a trade or business as a real estate dealer. Report this income on Schedule E.
5. Income from farm rentals (including rentals paid in crop shares) if, as landlord, you did not materially participate in the production or management of the production of farm products on the land. See chapter 12 of Pub. 225 for details.
6. Dividends on shares of stock and interest on bonds, notes, etc., if you did not receive the income in the course of your trade or business as a dealer in stocks or securities.
7. Gain or loss from:
   1. The sale or exchange of a capital asset;
   2. The sale, exchange, involuntary conversion, or other disposition of property unless the property is stock in trade or other property that would be includible in inventory, or held primarily for sale to customers in the ordinary course of the business; or
   3. Certain transactions in timber, coal, or domestic iron ore.
8. Net operating losses from other years.
9. Termination payments you received as a former insurance salesperson if all of the following conditions are met.
   1. The payment was received from an insurance company because of services you performed as an insurance salesperson for the company.
   2. The payment was received after termination of your agreement to perform services for the company.
   3. You did not perform any services for the company after termination and before the end of the year in which you received the payment.
   4. You entered into a covenant not to compete against the company for at least a 1-year period beginning on the date of termination.
   5. The amount of the payment depended primarily on policies sold by or credited to your account during the last year of the agreement, or the extent to which those policies remain in force for some period after termination, or both.
   6. The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for the company (regardless of whether eligibility for the payment depended on length of service).

taxmap/instr/i1040sse-003.htm#TXMP485931c6 Statutory Employee Income

If you were required to check the box on Schedule C or C-EZ, line 1, because you were a statutory employee, do not include the net profit or (loss) from that Schedule C, line 31 (or the net profit from Schedule C-EZ, line 3), on Short or Long Schedule SE, line 2. But if you file Long Schedule SE, be sure to include statutory employee social security wages and tips from Form W-2 on line 8a.

taxmap/instr/i1040sse-003.htm#TXMP43ec0386 Optional Methods

taxmap/instr/i1040sse-003.htm#TXMP09e8e40a How Can the Optional Methods Help You?

taxmap/instr/i1040sse-003.htm#TXMP7799b7b7 Social security coverage.

The optional methods may give you credit toward your social security coverage even though you have a loss or a small amount of income from self-employment.

taxmap/instr/i1040sse-003.htm#TXMP56a048f8 Earned income credit (EIC).

Using the optional methods may qualify you to claim the EIC or give you a larger credit if your net earnings from self-employment (determined without using the optional methods) are less than $1,600. Figure the EIC with and without using the optional methods to see if the optional methods will benefit you.

taxmap/instr/i1040sse-003.htm#TXMP6ae97365 Additional child tax credit.

Using the optional methods may qualify you to claim the additional child tax credit or give you a larger credit if your net earnings from self-employment (determined without using the optional methods) are less than $1,600. Figure the additional child tax credit with and without using the optional methods to see if the optional methods will benefit you.

taxmap/instr/i1040sse-003.htm#TXMP52333b85 Child and dependent care credit.

The optional methods may help you qualify for this credit or give you a larger credit if your net earnings from self-employment (determined without using the optional methods) are less than $1,600. Figure this credit with and without using the optional methods to see if the optional methods will benefit you.

taxmap/instr/i1040sse-003.htm#TXMP790e440a Self-employed health insurance deduction.

The optional methods of computing net earnings from self-employment may be used to figure your self-employed health insurance deduction.

Using the optional methods may give you the benefits described above, but they may also increase your SE tax.

taxmap/instr/i1040sse-003.htm#TXMP520ecf13 Farm Optional Method

You may use this method to figure your net earnings from farm self-employment if your gross farm income was $2,400 or less or your net farm profits were less than $1,733. Net farm profits are the total of the amounts from:

• Schedule F (Form 1040), line 36, and
• Schedule K-1 (Form 1065), box 14, code A (from farm partnerships).

There is no limit on how many years you can use this method.

Under this method, report on Part II, line 15, two-thirds of your gross farm income, up to $1,600, as your net earnings. This method can increase or decrease your net earnings from farm self-employment even if the farming business had a loss.

You can change the method after you file your return. That is, you can change from the regular to the optional method or from the optional to the regular method. To do this, file Form 1040X.

For a farm partnership, figure your share of gross income based on the partnership agreement. With guaranteed payments, your share of the partnership's gross income is your guaranteed payments plus your share of the gross income after it is reduced by all guaranteed payments made by the partnership. If you were a limited partner, include only guaranteed payments for services you actually rendered to or on behalf of the partnership.

taxmap/instr/i1040sse-003.htm#TXMP36b762df Nonfarm Optional Method

You may be able to use this method to figure your net earnings from nonfarm self-employment if your net nonfarm profits were less than $1,733 and also less than 72.189% of your gross nonfarm income. Net nonfarm profits are the total of the amounts from:

• Schedule C (Form 1040), line 31,
• Schedule C-EZ (Form 1040), line 3,
• Schedule K-1 (Form 1065), box 14, code A (from other than farm partnerships), and
• Schedule K-1 (Form 1065-B),  
  box 9, code J1.

To use this method, you also must be regularly self-employed. You meet this requirement if your actual net earnings from self-employment were $400 or more in 2 of the 3 years preceding the year you use the nonfarm optional method. The net earnings of $400 or more could be from either farm or nonfarm earnings or both. The net earnings include your distributive share of partnership income or loss subject to SE tax.

Use of the nonfarm optional method from nonfarm self-employment is limited to 5 years. The 5 years do not have to be consecutive.

Under this method, report on Part II, line 17, two-thirds of your gross nonfarm income, up to $1,600, as your net earnings. But you cannot report less than your actual net earnings from nonfarm self-employment.

You can change the method after you file your return. That is, you can change from the regular to the optional method or from the optional to the regular method. To do so, file Form 1040X.

Figure your share of gross income from a nonfarm partnership in the same manner as a farm partnership. See Farm Optional Method on this page for details.

taxmap/instr/i1040sse-003.htm#TXMP153ae8ca Using Both Optional Methods

If you can use both methods, you can report less than your total actual net earnings from farm and nonfarm self-employment, but you cannot report less than your actual net earnings from nonfarm self-employment alone.

If you use both methods to figure net earnings, you cannot report more than $1,600 of net earnings from self-employment.

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