What Are Net Earnings From Self-Employment? The net profit subject to SE tax is called net earnings fromself-employment. Your net profit is shown on the lines of the following schedules. Schedule F (Form 1040) Line 36 Schedule C (Form 1040) Line 31 Schedule C-EZ (Form 1040) Line 3 Schedule K-1 (Form 1065) Line 15a Schedule K-1 (Form 1065-B) Box 9 Various types of income included in net earnings fromself-employment are discussed next. The list is not all inclusive. Taxable patronage dividends (distributions) fromcooperatives. Government agricultural program payments, includingcommodity program payments and conservation reserve program (CRP)payments. (If you do not materially participate in farming operationson the land, the CRP payment is not included in net earnings fromself-employment.) Taxable Commodity Credit Corporation loans. Refunds and rebates, if they represent a reduction in adeductible expense item, including a fuel tax credit included inincome. Prizes or awards on farm produce or livestock. Crop damage payments. Value of property and services received for farmproducts. Sales of unharvested crops, if not sold with land that washeld more than 1 year. Rent you receive if you meet one of the four materialparticipation tests explained later under Landlord Participationin Farming. If you receive the rent as crop shares, you must meet the test atthe time the crop shares are produced. However, the crop shares areincluded in net earnings from self-employment in the year they areconverted to money or the equivalent of money. Any amounts for depreciation, including any section 179deduction, recaptured because the business use of the property wasreduced to 50% or less. This does not include amounts recaptured onthe disposition of property. Lost income payments received from insurance or othersources for reducing or stopping farming activities. Even if you arenot farming when you receive the payment, it is included in netearnings from self-employment if it relates to your farm business(even though it is temporarily inactive). A connection exists if it isclear the payment would not have been made but for your conduct ofyour farm business. Your distributive share of income or loss, includingguaranteed payments, from your partnership or LLC's trade orbusiness. Income not included in net earnings from self-employment.Certain kinds of income are not included in net earnings fromself-employment, even though they are included when figuring yourincome tax. Rental income you receive from real estate and from personalproperty leased with real estate is not included in net earnings fromself-employment. It does not matter if the rent is received in cropshares, cash, or other property. This rule applies if the landlorddoes not materially participate in the production ormanagement of production of farm products on the land. If the landlordmaterially participates, see Landlord Participation in Farming,later. Interest is not included in net earnings fromself-employment unless you receive it in your trade or business, suchas interest on accounts receivable. Dividends on securities you own are not included in netearnings from self-employment unless you are a dealer in securitieswho is not holding the securities for speculation orinvestment. A gain or loss from the disposition of property that isneither stock in trade nor held primarily for sale to customers is notincluded in net earnings from self-employment. It does not matterwhether the disposition is a sale, exchange, or involuntaryconversion. For example, gains or losses from the disposition of thefollowing types of property are not included in net earnings fromself-employment. Investment property. Depreciable property or other fixed assets used in yourtrade or business. Livestock held for draft, dairy, breeding, or sportingpurposes, and not held primarily for sale, regardless of how long thelivestock was held, or whether it was raised or purchased. Unharvestedcrops sold with land held morethan one year. Timber, coal, or iron ore held for more than one year if aneconomic interest was retained, such as a right to receive coalroyalties. A gain or loss from the cutting of timber is not included in netearnings from self-employment if the cutting is treated as a sale orexchange. Wages and salaries received for services performed as anemployee and covered by social security or railroad retirement are notincluded in net earnings from self-employment. Wages paid in kind to you for agricultural labor, such ascommodity wages, are not included in net earnings fromself-employment. A limited partner's distributive share of partnership income(or loss) is not used to figure net earnings from self-employment.However, guaranteed payments, such as salary and professional feesreceived for services performed by a limited partner, are included innet earnings from self-employment. Retirement income received by the partner from his or herpartnership under a written plan is not included in net earnings fromself-employment if all the following apply. The retired partner performs no services for the partnershipduring the year. The retired partner is owed only the retirementpayments. The retired partner's share (if any) of the partnershipcapital was fully paid to the retired partner. The payments to the retired partner are lifelong, periodicpayments. Landlord Participationin Farming As a general rule, income and deductions from rentals and frompersonal property leased with real estate are not included indetermining net self-employment income. However, income and deductionsfrom farm rentals, including government commodity program paymentsreceived by a landowner who rents land, are included if the rentalarrangement provides that the landlord will, and he or she does,materially participate in the production or management of productionof the farm products on the land. Crop shares.Rent paid in the form of crop shares is included in self-employmentincome for the year you sell, exchange, give away, or use the cropshares if you meet one of the four material participation tests at thetime the crop shares are produced. Feeding such crop shares tolivestock is considered using them. Your gross income for figuringyour net earnings from self-employment under the Farm OptionalMethod includes the fair market value of the crop shares whenthey are used as feed. Material participation.You materially participate if you have an arrangement with yourtenant for your participation and you meet one of the following tests. You do any three of the following. Pay, using cash or credit, at least half the direct costs ofproducing the crop or livestock. Furnish at least half the tools, equipment, and livestockused in the production activities. Advise or consult with your tenant. Inspect the production activities periodically. You regularly and frequently make, or take an important partin making, management decisions substantially contributing to oraffecting the success of the enterprise. You work 100 hours or more spread over a period of 5 weeksor more in activities connected with agricultural production. You do things which, considered in their totality, show thatyou are materially and significantly involved in the production of thefarm commodities. These tests may be used as general guides for determiningwhether you are a material participant. Example.Drew Houston agrees to produce a crop on J. Clarke's cotton farmwith each receiving half the proceeds. Clarke furnishes all thenecessary equipment and advises Houston when to plant, to chop, plow,spray, and pick the cotton. During the growing season, Clarke inspectsthe crop every few days to determine whether Houston is properlytaking care of the crop. Houston furnishes all labor needed to growand harvest the crop. The management decisions made by J. Clarke in connection with thecare of the cotton crop and his regular inspection of the crop, alongwith all the necessary equipment he furnishes, establish that heparticipates to a material degree in the cotton production operations.The income Clarke receives from his cotton farm is included incomputing his net earnings from self-employment.