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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.
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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.
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The pay is not more than $100 per trip.
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The pay is received only if there is a minimum catch.
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The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry.
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You get a share of the catch or a share of the proceeds from the sale of the catch.
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Your share depends on the amount of the catch.
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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.)
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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:
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A foreign government,
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A wholly-owned instrumentality of a foreign government, or
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An international organization.
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Your employer is not required to withhold social security and Medicare taxes from your wages.
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.
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.
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.
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.
There are three ways to figure your net earnings from self-employment.
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The regular method.
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The nonfarm optional method.
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The farm optional method.
You must use the regular method unless you are eligible to use one or both of the optional methods.
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You want to receive credit for social security benefit coverage.
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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.)
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You are entitled to the earned income credit. (An optional method may increase your earned income, which could increase your credit.)
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You are entitled to the additional child tax credit. (An optional method may increase your earned income, which could increase your credit.)
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.
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.
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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.
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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.
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Your net nonfarm profits were:
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Less than $4,548, and
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Less than 72.189% of your gross nonfarm income.
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Line 31, Schedule C (Form 1040),
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Line 3, Schedule C-EZ (Form 1040),
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Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and
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Box 9, code J1, Schedule K-1 (Form 1065-B).
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.
Table 10-1. Figuring Nonfarm Net Earnings
IF your gross nonfarm income is ... | THEN your net earnings are equal to ... |
$6,300 or less | Two-thirds of your gross nonfarm income. |
More than $6,300 | $4,200 |
Example 1. Net nonfarm profit less than $4,548 and less than 72.189% of gross nonfarm income.
Ann Green runs a craft business. Her actual net earnings from self-employment were $800 in 2006 and $900 in 2007. 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 2008 are as follows:
Gross nonfarm income | $5,400 |
Net nonfarm profit | $1,200 |
Ann's actual net earnings for 2008 are $1,108 ($1,200 × .9235). Because her net profit is less than $4,548 and less than 72.189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 ( × $5,400). Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2008.
Example 2. Net nonfarm profit less than $4,548 but not less than 72.189% of gross nonfarm income.
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.
Example 3. Net loss from a nonfarm business.
Assume that in Example 1 Ann has a net loss of $700. She can use the nonfarm optional method and report $3,600 ( × $5,400) as her net earnings.
Example 4. Nonfarm net earnings less than $400.
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.
Example 1. Net nonfarm profit less than $4,548 and less than 72.189% of gross nonfarm income.
John White runs an appliance repair shop. His actual net earnings from self-employment were $10,500 in 2006 and $9,500 in 2007. 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 2008 are as follows:
Gross nonfarm income | $12,000 |
Net nonfarm profit | $1,200 |
John's actual net earnings for 2008 are $1,108 ($1,200 × .9235). Because his net profit is less than $4,548 and less than 72.189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,200. Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,200 for 2008.
Use the farm optional method only for earnings from a farming business. See Publication 225 for information about this method.
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:
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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.
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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 $4,200 as your combined net earnings from self-employment.
Example.
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.
Table 10-2. Example—Farm and Nonfarm Earnings
Income and Earnings | Farm | Nonfarm |
Gross income | $3,000 | $6,000 |
Actual net earnings | $900 | $500 |
Optional net earnings ( of gross income) | $2,000 | $4,000 |
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.
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Method 1. Using the regular method for both farm and nonfarm income.
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Method 2. Using the optional method for farm income and the regular method for nonfarm income.
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Method 3. Using the regular method for farm income and the optional method for nonfarm income.
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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.
Table 10-3. Example—Net Earnings
Net Earnings | 1 | 2 | 3 | 4 |
Actual farm |
$ 900 | $ 900 | ||
Optional farm |
$ 2,000 | $ 2,000 | ||
Actual nonfarm |
$ 500 | $ 500 | ||
Optional nonfarm |
$4,000 | $4,000 | ||
Amount you can report: | $1,400 | $2,500 | $4,900 | $4,200* |
*Limited to $4,200 because you used both optional methods. |
Use Schedule SE (Form 1040) to figure and report your SE tax. Then enter the SE tax on line 57 of Form 1040 and attach Schedule SE to Form 1040.
Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. However, certain taxpayers must use Section B—Long Schedule SE.
If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return.Example.
You are the sole proprietor of two separate businesses. You operate a restaurant that made a net profit of $25,000. You also have a cabinetmaking business that had a net loss of $500. You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. You file Schedule SE showing total earnings subject to SE tax of $24,500.
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