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To calculate the net earnings from self-employment, follow the steps below:
Add up your total gross income as calculated under the income tax law. Include income from all your trades and businesses.
Subtract all the deductions, including the allowances for depreciation that you are allowed when you calculate your income tax from the result in (A). This gives you your net earnings.
Effective with taxable years beginning after 12/31/89 multiply the result obtained in B. by .9235 (i.e., 100% - 7.65% = 92.35% or 0.9235) to derive your net earnings.
Note: If you have more than one business, calculate net earnings by adding up the net profits or losses from all the businesses. Net earnings also include any ordinary income or loss from partnerships. If any part of your income is included in gross earnings from self-employment, expenses connected with this income cannot be deducted.
Under certain circumstances, optional methods of computing net earnings from self- employment are available. For a discussion of these methods, see §§1233-1235and §§1241-1244.
Definitions of terms used in calculating income for income tax purposes also apply to calculating net earnings from self-employment. For further information on these calculations, see the tax guides available from any Internal Revenue Service office, especially: Farmer's Tax Guide, Internal Revenue Service Publication No. 225, and Tax Guide for Small Business, Internal Revenue Service Publication No. 334.
Last Revised: Jul. 20, 2006
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