Figuring Self-Employment Tax There are three steps to figure the SE tax you owe. Figure your net self-employment income. Figure your net earnings from self-employment. Multiply your net earnings by the tax rate. Step 1--Figure Your NetSelf-Employment Income Net SE income usually includes all farm and nonfarm business incomeless all business deductions allowed for income tax purposes. You mustclaim all allowable deductions when figuring net SE income. Your netSE income is used to figure your net earnings from self-employment.(See Step 2--Figure Your Net Earnings From Self-Employment,later.) You must figure your net income from self-employment byusing the same accounting method you use for income tax purposes. Your net SE income is shown on the lines of the followingschedules. 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 More than one business.If you have more than one trade or business, you must combine thenet profit (or loss) from each business to determine your net SEincome. A loss from one business will reduce your profit from anotherbusiness. File one Schedule SE showing the net SE income, but file aseparate Schedule F or C for each business. Deductions and exemptions.Do not reduce your SE income by any of the following. Deductions for personal exemptions for yourself, yourspouse, or dependents. The standard deduction or itemized deductions. The net operating loss deduction. Nonbusiness deductions (including contributions on yourbehalf to a pension, profit-sharing plan, annuity plan, Keogh, SIMPLE,or SEP plan). The self-employed health insurance deduction. The deduction for one-half of your SE tax. Step 2--Figure Your NetEarnings From Self-Employment The net SE income subject to SE tax is called net earnings fromself-employment. hotel rooms MontecatiniMinimum earnings subject to SE tax.You must have $400 or more of net earnings from self-employment tobe subject to the tax. For this purpose, net earnings are figured online 4 of Schedule SE, Section A, or line 4c of Schedule SE, SectionB. If your net earnings are less than $400, you do not have to fileSchedule SE (Form 1040) or pay the tax, unless you performed servicesfor a church as an employee and received income of $108.28or more. How to figure net earnings.There are three ways to figure net earnings from self-employment. Regular method. Farm optional method. Nonfarm optional method. You must use the regular method unless you are eligible to use oneor both of the optional methods. See Figure 15-1. Figure 15-1 Why use the optional methods?You may want to use the optional methods (discussed later) when youhave a loss or a small amount of net income from self-employment andany one of the following applies. You want to receive credit for social security benefitcoverage. You incurred child or dependent care expenses for which youcould claim a credit. (This method will increase your earned income,which could increase your credit.) You are entitled to the earned income credit. (This methodwill increase your earned income, which could increase yourcredit.) Regular Method Multiply your net SE income by 92.35% (.9235) to get your netearnings under the regular method. See Short Schedule SE,line 4, or Long Schedule SE, line 4a. You must use the regular method unless you are eligible to use oneor both of the optional methods. Farm Optional Method As an individual farmer or as a partner in a farming business, youmay be able to use the farm optional method to figure your netearnings from farm self-employment. This method allows you to continuepaying SE tax for your social security coverage when your net profitfor the year is small or you have a loss. Optional earnings less than actual earnings.If your net earnings under the farm optional method are less thanyour actual net earnings, you can still use the farm optional method.For example, your actual net earnings from self-employment are $425and your net earnings figured under the farm optional method are $390.You owe no SE tax if you use the optional method, because your netearnings under the farm optional method are below $400. Gross income of $2,400 or less.If your gross income from farming is $2,400 or less, you may reporttwo-thirds of this gross income as your net earnings from farmself-employment. Gross income of more than $2,400.If your gross income from farming is more than $2,400 and your netfarm profit shown on line 36 of Schedule F (Form 1040) or line 15a ofSchedule K-1 (Form 1065) is less than $1,733, you may report$1,600 as your net earnings from farm self-employment. But if yourgross income from farming is more than $2,400 and your net farm profitis $1,733 or more, you cannot use the optional method. Since two-thirds of $2,400 is $1,600, this counts for two credits($1,600 $740) for social security coverage in 1999. Youcannot use the full amount of your gross income to determine creditswhen you are figuring the SE tax on only two-thirds of that amount. Gross income from farming.Farming income includes what you receive from cultivating the soilor raising or harvesting any agricultural commodities. It alsoincludes income from the operation of a livestock, dairy, poultry,bee, fish, fruit, or truck farm, or plantation, ranch, nursery,orchard, or oyster bed. This includes income you receive in the formof crop shares if you materially participate in production ormanagement of production of the crop. Your gross income from farming does not include any item listedearlier under Income that is not SE income. If you receivegovernment commodity program payments on land you rent out, do notinclude these payments unless you meet one of the four materialparticipation tests, explained earlier. Also, do not include anyincome from a nonfarm business. Cash method of accounting.If you file your return using the cash method and are not a memberof a farming partnership, your gross income from farming willordinarily be the amount shown on line 11 of Schedule F. Accrual method of accounting.If you file your return using an accrual method and you are not amember of a farming partnership, your gross income from farming willordinarily be the amount shown on line 51 of Schedule F. Gross income from a farm partnership.Your gross income under the farm optional method includes yourdistributive share of a partnership's gross income from farming. To determine your distributive share of gross income from a farmpartnership, the partnership does the following. Figures the partnership's gross income from farming. Subtracts any guaranteed payments to partners for servicesor the use of capital. Determines your share of what is left. The gross income thatremains after steps (1) and (2) is divided among the partners in thesame way they share the ordinary income (or loss) of the partnership,unless the partnership agreement provides otherwise. The result determined in (3) above is your distributive share ofthe partnership's gross income from farming. If you have no othergross income from farming, including guaranteed payments discussednext, use this distributive share of gross income to determine whetheryou can use the farm optional method to figure your net earnings fromself-employment. Guaranteed payments.Any guaranteed payments you receive from a farm partnership aregross income from your farming (not the partnership's). Use the totalof these guaranteed payments, your distributive share of gross incomefrom a farm partnership, and any other gross income you receive fromfarming to determine whether you can use the farm optional method tofigure your net earnings from self-employment. Example.Bill and John are partners and share in ordinary income or loss ona 50-50 basis, with no guaranteed payments. If the partnershiphas $3,000 gross income from farming, each would have $1,500 grossincome for purposes of the optional method. If Bill had been guaranteed $1,000 without regard to partnershipincome, his gross income from farming would be $2,000 ($1,000 plus 50%of $2,000). John's gross income would be $1,000. alberghi bed and breakfast MamaiaTwo or more farms.If you run your own farm and are also a partner in a farmpartnership, or in any way have gross farm income from more than onefarm, you must add your farm income from all farming sources to getyour total net earnings from farm self-employment. If you use the farmoptional method, you must add all gross income from farming to makethe $2,400 test. Example.Your gross income from your own farm is $600 and your distributiveshare of the gross income from a farm partnership is $900. Since yourgross income from farming is less than $2,400 ($1,500), your netearnings from self-employment under the farm optional method are$1,000 ( 2/3 of $1,500). NonfarmOptional Method This is an optional method available for determining net earningsfrom nonfarm self-employment much like the farm optional method. If you are also engaged in a nonfarm business, you may be able touse this method to compute your net earnings from self-employment fromyour nonfarm business. You may use this method even if you do not usethe farm optional method for determining your net earnings from yourfarm self-employment and even if you have a net loss from your nonfarmbusiness. For more information about the nonfarm optional method, seePublication 533. Using Both Optional Methods You may not combine farming income with nonfarm income fromself-employment to figure your net earnings under either of theoptional methods. If you use both optional methods, you must addtogether the net earnings figured under each method to arrive at yourtotal net earnings from self-employment. You may report less than yourtotal actual net earnings from farm and nonfarm self-employment. Ifyou use both optional methods, you may report no more than $1,600 asyour combined net earnings from self-employment. Step 3--Multiply Your Net Earnings by the Tax Rate Multiply the net earnings you figured in Step 2 by the tax rate toget your SE tax. The SE tax rate is 15.3% (12.4% social security taxplus 2.9% Medicare tax). It is the same for net earnings figured undereach method. Special rules (explained under Maximum earnings subject to SEtax and Fiscal tax year, next) apply to thiscomputation if either of the following applies. Your combined wages, tips, and net earnings are more than$72,600. You use a fiscal tax year. Maximum earnings subject to SE tax.Only the first $72,600 of your combined wages, tips, and netearnings in 1999 is subject to any combination of the 12.4% socialsecurity part of SE tax, social security tax, or railroad retirement(tier 1) tax. All your combined wages, tips, and net earnings in 1999 are subjectto any combination of the 2.9% Medicare part of SE tax, socialsecurity tax, or railroad retirement (tier 1) tax. If your wages and tips are subject to either social security orrailroad retirement (tier 1) tax, or both, and total at least $72,600,you do not have to pay the 12.4% social security part of the SE tax onany of your net earnings. However, you must pay the 2.9% Medicarepart of the SE tax on all your net earnings. Fiscal tax year.If you use a tax year other than the calendar year, you must usethe tax rate and maximum earnings limit in effect at the beginning ofyour tax year. Even if the tax rate or maximum earnings limit changesduring your tax year, you should continue to use the same rate andlimit throughout your tax year. Regular Method The following paragraphs explain how to figure the SE tax using netearnings under the regular method. Net earnings and wages not more than $72,600.If your net earnings from self-employment plus any wages and tipsare not more than $72,600 and you do not have to use LongSchedule SE, use Short Schedule SE. On line 5,multiply your net earnings by 15.3% (.153). The result is your SE tax. Example 1.You have $30,000 in net SE income and receive no wages subject tosocial security and Medicare taxes for the year. Multiply the $30,000by 0.9235 on Short Schedule SE to get your net earningsfrom self-employment of $27,705. Your SE tax is 15.3% (.153) of$27,705, or $4,238.87. Example 2.You have $20,000 in net SE income and receive $15,000 in wagessubject to social security and Medicare taxes for the year. Multiplythe $20,000 by 0.9235 on Short Schedule SE to get your netearnings from self-employment of $18,470. Your SE tax is 15.3% (.153)of $18,470, or $2,825.91. Net earnings more than $72,600 and no wages.If you had no wages, had net earnings from self-employment of morethan $72,600, and do not have to use Long Schedule SE, useShort Schedule SE. On line 5, multiply the line 4 netearnings by the 2.9% (.029) Medicare tax and add the result to$9,002.40 (12.4% of $72,600). The total is your SE tax. Example.During 1999, you have $80,000 in net SE income and receive no wagessubject to social security and Medicare taxes. Multiply the $80,000 by0.9235 on Short Schedule SE to get your net earnings of$73,880. Since only $72,600 of your earnings are subject to the socialsecurity part of the SE tax, your tax for this part is $9,002.40(12.4% of $72,600). Since all your net earnings are subject to the Medicare part of theSE tax, multiply $73,880 by 2.9% (.029) on Short Schedule SEfor the Medicare part. The result is $2,142.52. Add this to$9,002.40 for a total SE tax of $11,144.92. Net earnings and wages more than $72,600.If your net earnings from self-employment plus any wages and tipsare more than $72,600, you must use Long Schedule SE.Subtract your total wages and tips from $72,600 to find themaximum earnings subject to the 12.4% social security part of the tax.If more than zero, multiply the amount by 12.4% (.124). The result isthe social security tax amount. Then multiply your net earnings fromself-employment by 2.9% (.029). The result is the Medicare tax amount.The total of the social security tax amount and the Medicare taxamount is your SE tax. Example.During 1999, you have $80,000 in net SE income and receive $10,000in wages subject to social security and Medicare taxes for the year.You figured your net earnings on Long Schedule SE, line 4a,to be $73,880. Next, subtract your wages of $10,000 from $72,600, themaximum income subject to the social security part of the SE tax. Theresult is $62,600. Since only $62,600 of your earnings are subject tothe social security part of the SE tax, your tax for this part is12.4% (.124) $62,600, or $7,762.40. Since all your net earnings are subject to the Medicare part of theSE tax, multiply all the net earnings from self-employment, $73,880,by 2.9% (.029) on Long Schedule SE for the Medicare part.The result is $2,142.52. Add this to the $7,762.40 figured above fortotal SE tax of $9,904.92. Optional Methods If your net earnings under the farm optional method or the nonfarmoptional method are $400 or more, use Long Schedule SE tofigure your SE tax. Effect on taxes.If you use either or both optional methods, you must figure and paythe SE tax due under these methods, even if you would have had asmaller tax or no tax using the regular method. The optional methods may be used only to figure your SE tax. Tofigure your income tax, include your actual SE income in gross income,regardless of which method you use to figure SE tax.