Previous Page: Publication 334 - Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) - Not-for-Profit Activities Next Page: Publication 334 - Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) - Reporting Self-Employment Tax Use   to find additional occurrences of topic items.

taxmap/pubs/p334-038.htm#TXMP29674e22 Chapter 10 Self-Employment (SE) Tax(p41)

Self-Employment (SE) Tax

The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits.

taxmap/pubs/p334-038.htm#TXMP05bef840 Who Must Pay SE Tax?(p41)

Who Must Pay SE Tax?

Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Use Schedule SE to figure net earnings from self-employment.

taxmap/pubs/p334-038.htm#TXMP06b2cfde Sole proprietor or independent contractor.(p41)

If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax.

taxmap/pubs/p334-038.htm#TXMP3b59c630 SE tax rate.(p41)

The SE tax rate on net earnings is 15.3% (12.4% social security tax plus 2.9% Medicare tax).

taxmap/pubs/p334-038.htm#TXMP288a7914 Maximum earnings subject to self-employment tax.(p41)

Only the first $97,500 of your combined wages, tips, and net earnings in 2007 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.

All of your combined wages, tips, and net earnings in 2007 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax.

If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $97,500, do not pay the 12.4% social security part of the SE tax on any of your net earnings. However, you must pay the 2.9% Medicare part of the SE tax on all your net earnings.

taxmap/pubs/p334-038.htm#TXMP631e4052 Special Rules and Exceptions(p41)

Special Rules and Exceptions

taxmap/pubs/p334-038.htm#TXMP758f5dee Aliens.(p41)

Resident aliens are generally subject to the same rules that apply to U.S. citizens. Nonresident aliens are not subject to SE tax. Residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa, however, are subject to the tax. For SE tax purposes, they are not nonresident aliens. For more information on aliens, see Publication 519, U.S. Tax Guide for Aliens.

taxmap/pubs/p334-038.htm#TXMP33606b5f Church employee.(p41)

If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108.28 or more in wages from the church or organization. For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers.

taxmap/pubs/p334-038.htm#TXMP11c8b7b6 Fishing crew member.(p41)

If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply.

1. You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions.
   1. The pay is not more than $100 per trip.
   2. The pay is received only if there is a minimum catch.
   3. The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry.
2. You get a share of the catch or a share of the proceeds from the sale of the catch.
3. Your share depends on the amount of the catch.
4. The boat's operating crew normally numbers fewer than 10 individuals. (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10.)

You are not subject to SE tax if you are under age 18 and you are working for your father or mother.

taxmap/pubs/p334-038.htm#TXMP58e53caa Notary public.(p41)

Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)).

taxmap/pubs/p334-038.htm#TXMP184d4256 State or local government employee.(p41)

You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement.

taxmap/pubs/p334-038.htm#TXMP7c634610 Foreign government or international organization employee.(p41)

You are subject to SE tax if both the following conditions are true.

1. You are a U.S. citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by:
   1. A foreign government,
   2. A wholly-owned instrumentality of a foreign government, or
   3. An international organization.
2. Your employer is not required to withhold social security and Medicare taxes from your wages.

taxmap/pubs/p334-038.htm#TXMP7ae0b130 U.S. citizen or resident alien residing abroad.(p42)

If you are a self-employed U.S. citizen or resident alien living outside the United States, in most cases you must pay SE tax. Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion.

taxmap/pubs/p334-038.htm#TXMP51cbd1d2 Exception.(p42)

The United States has social security agreements with many countries to eliminate double taxation under two social security systems. Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country.

For more information, see the Instructions for Schedule SE (Form 1040).

taxmap/pubs/p334-038.htm#TXMP6f3da34a More Than One Business(p42)

Business, More Than One

If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. A loss from one business reduces your profit from another business.

taxmap/pubs/p334-038.htm#TXMP6e85feaf Community Property Income(p42)

Community Property Income

If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business.

taxmap/pubs/p334-038.htm#TXMP0fcf5e2e Gain or Loss(p42)

Sale of Property, Gain or Loss

Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. It does not matter whether the disposition is a sale, exchange, or an involuntary conversion.

taxmap/pubs/p334-038.htm#TXMP6e9bf49a Lost Income Payments(p42)

Lost Income Payments

If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive.

taxmap/pubs/p334-038.htm#TXMP654b91e6 Figuring Earnings Subject to SE Tax(p42)

Figuring Earnings Subject to SE Tax

taxmap/pubs/p334-038.htm#TXMP4e1ec2ec Methods for Figuring Net Earnings(p42)

Methods for Figuring Net Earnings

There are three ways to figure your net earnings from self-employment.

1. The regular method.
2. The nonfarm optional method.
3. The farm optional method.

You must use the regular method unless you are eligible to use one or both of the optional methods.

taxmap/pubs/p334-038.htm#TXMP5cc451fa Why use an optional method?(p42)

You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies.

• You want to receive credit for social security benefit coverage.
• You incurred child or dependent care expenses for which you could claim a credit. (An optional method may increase your earned income, which could increase your credit.)
• You are entitled to the earned income credit. (An optional method may increase your earned income, which could increase your credit.)
• You are entitled to the additional child tax credit. (An optional method may increase your earned income, which could increase your credit.)

taxmap/pubs/p334-038.htm#TXMP3a6645a3 Effects of using an optional method.(p42)

Using an optional method could increase your SE tax. Paying more SE tax could result in your getting higher benefits when you retire.

If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller tax or no tax using the regular method.

The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax.

taxmap/pubs/p334-038.htm#TXMP68f59150 Regular Method(p42)

Regular Method

Multiply your total earnings subject to SE tax by 92.35% (.9235) to get your net earnings under the regular method. See Short Schedule SE, line 4, or Long Schedule SE, line 4a.

Net earnings figured using the regular method are also called actual net earnings.

taxmap/pubs/p334-038.htm#TXMP36b762df Nonfarm Optional Method(p42)

Nonfarm Optional Method

Use the nonfarm optional method only for earnings that do not come from farming. You may use this method if you meet all the following tests.

1. You are self-employed on a regular basis. This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years before the one for which you use this method. The net earnings can be from either farm or nonfarm earnings or both.
2. You have used this method less than 5 years. (There is a 5-year lifetime limit.) The years do not have to be one after another.
3. Your net nonfarm profits were:
   1. Less than $1,733, and
   2. Less than 72.189% of your gross nonfarm income.

taxmap/pubs/p334-038.htm#TXMP7396a48b Net nonfarm profits.(p43)

Net nonfarm profit generally is the total of the amounts from:

• Line 31, Schedule C (Form 1040),
• Line 3, Schedule C-EZ (Form 1040),
• Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and
• Box 9, code J1, Schedule K-1 (Form 1065-B).

However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss.

taxmap/pubs/p334-038.htm#TXMP6eafa27a Gross nonfarm income.(p43)

Your gross nonfarm income generally is the total of the amounts from:

• Line 7, Schedule C (Form 1040),
• Line 1, Schedule C-EZ (Form 1040),
• Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and
• Box 9, code J2, Schedule K-1 (Form 1065-B).

taxmap/pubs/p334-038.htm#TXMP69529727 Figuring Nonfarm Net Earnings(p43)

Figuring Nonfarm Net Earnings

If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method.

IF your gross nonfarm income is ...	THEN your net earnings are equal to ...
$2,400 or less	Two-thirds of your gross nonfarm income.
More than $2,400	$1,600

taxmap/pubs/p334-038.htm#TXMP0d82d8d6 Actual net earnings.(p43)

Your actual net earnings are 92.35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92.35% (.9235) to get actual net earnings). Actual net earnings are equivalent to net earnings figured using the regular method.

taxmap/pubs/p334-038.htm#TXMP5208cd53 Optional net earnings less than actual net earnings.(p43)

You cannot use this method to report an amount less than your actual net earnings from self-employment.

taxmap/pubs/p334-038.htm#TXMP4261dd3c Gross nonfarm income of $2,400 or less.(p43)

The following examples illustrate how to figure net earnings when gross nonfarm income is $2,400 or less.

taxmap/pubs/p334-038.htm#TXMP1f38dcee
Example 1. Net nonfarm profit less than $1,733 and less than 72.189% of gross nonfarm income.(p43)

Ann Green runs a craft business. Her actual net earnings from self-employment were $800 in 2005 and $900 in 2006. She meets the test for being self-employed on a regular basis. She has used the nonfarm optional method less than 5 years. Her gross income and net profit in 2007 are as follows:

Gross nonfarm income	$2,100
Net nonfarm profit	$1,200

Ann's actual net earnings for 2007 are $1,108 ($1,200 × .9235). Because her net profit is less than $1,733 and less than 72.189% of her gross income, she can use the nonfarm optional method to figure net earnings of $1,400 (2/3 × $2,100). Because these net earnings are higher than her actual net earnings, she can report net earnings of $1,400 for 2007.

taxmap/pubs/p334-038.htm#TXMP1a980f99
Example 2. Net nonfarm profit less than $1,733 but not less than 72.189% of gross nonfarm income.(p43)

Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. She must use the regular method to figure her net earnings. She cannot use the nonfarm optional method because her net profit is not less than 72.189% of her gross income.

taxmap/pubs/p334-038.htm#TXMP37aab3d9
Example 3. Net loss from a nonfarm business.(p43)

Assume that in Example 1 Ann has a net loss of $700. She can use the nonfarm optional method and report $1,400 (2/3 × $2,100) as her net earnings.

taxmap/pubs/p334-038.htm#TXMP50397049
Example 4. Nonfarm net earnings less than $400.(p43)

Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400.

taxmap/pubs/p334-038.htm#TXMP6f319cd7 Gross nonfarm income of more than $2,400.(p43)

The following examples illustrate how to figure net earnings when gross nonfarm income is more than $2,400.

taxmap/pubs/p334-038.htm#TXMP10d5f433
Example 1. Net nonfarm profit less than $1,733 and less than 72.189% of gross nonfarm income.(p43)

John White runs an appliance repair shop. His actual net earnings from self-employment were $10,500 in 2005 and $9,500 in 2006. He meets the test for being self-employed on a regular basis. He has used the nonfarm optional method less than 5 years. His gross income and net profit in 2007 are as follows:

Gross nonfarm income	$12,000
Net nonfarm profit	$1,200

John's actual net earnings for 2007 are $1,108 ($1,200 × .9235). Because his net profit is less than $1,733 and less than 72.189% of his gross income, he can use the nonfarm optional method to figure net earnings of $1,600. Because these net earnings are higher than his actual net earnings, he can report net earnings of $1,600 for 2007.

taxmap/pubs/p334-038.htm#TXMP28567c37
Example 2. Net nonfarm profit not less than $1,733.(p44)

Assume that in Example 1 John's net profit is $1,800. He must use the regular method. He cannot use the nonfarm optional method because his net nonfarm profit is not less than $1,733.

taxmap/pubs/p334-038.htm#TXMP3f201ec3
Example 3. Net loss from a nonfarm business.(p44)

Assume that in Example 1 John has a net loss of $700. He can use the nonfarm optional method and report $1,600 as his net earnings from self-employment.

taxmap/pubs/p334-038.htm#TXMP520ecf13 Farm Optional Method(p44)

Farm Optional Method

Use the farm optional method only for earnings from a farming business. See Publication 225 for information about this method.

taxmap/pubs/p334-038.htm#TXMP153ae8ca Using Both Optional Methods(p44)

Optional Methods, Using Both

If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment.

To figure your net earnings using both optional methods, you must:

• Figure your farm and nonfarm net earnings separately under each method. Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method.
• Add the net earnings figured under each method to arrive at your total net earnings from self-employment.

You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. If you use both optional methods, you can report no more than $1,600 as your combined net earnings from self-employment.

taxmap/pubs/p334-038.htm#TXMP5d3f067c
Example.(p44)

You are a self-employed farmer. You also operate a retail grocery store. Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2.

Income and Earnings	Farm	Nonfarm
Gross income	$1,200	$1,500
Actual net earnings	0$900	0$500
Optional net earnings (2/3 of gross income)	0$800	$1,000

Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2.

• Method 1. Using the regular method for both farm and nonfarm income.
• Method 2. Using the optional method for farm income and the regular method for nonfarm income.
• Method 3. Using the regular method for farm income and the optional method for nonfarm income.
• Method 4. Using the optional method for both farm and nonfarm income.

Note. Actual net earnings is the same as net earnings figured using the regular method.

Net Earnings	1	2	3	4
Actual farm	$ 900		$ 900
Optional farm		$ 800		$ 800
Actual nonfarm	$ 500	$ 500
Optional nonfarm			$1,000	$1,000
Amount you can report:	$1,400	$1,300	$1,900	$1,600*

*Limited to $1,600 because you used both optional methods.

taxmap/pubs/p334-038.htm#TXMP4dd84533 Fiscal Year Filer(p44)

Fiscal Year Filer

If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.

Previous Page:  Publication 334 - Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) - Not-for-Profit Activities Next Page:  Publication 334 - Tax Guide for Small Business (For Individuals Who Use Schedule C or C-EZ) - Reporting Self-Employment Tax Use   to find additional occurrences of topic items.