Figuring Net Earnings From Self-Employment for SE Tax There are three methods for figuring your net earnings fromself-employment: Regular method, Farm optional method, or Nonfarm optional method. Regular Method Most people use the regular method. Under this method, you figureyour net earnings from self-employment by totaling your gross incomefor services you performed as a minister, a member of a religiousorder who has not taken a vow of poverty, or Christian Sciencepractitioner. Then you subtract your allowable business deductions andmultiply the difference by .9235 (92.35%). Use Schedule SE (Form 1040)to figure your net earnings and SE tax. If you are an employee of the church that elected to exclude youfrom FICA coverage, figure net earnings by multiplying your churchwages shown on Form W-2 by .9235. Do not reduce your wages by anybusiness deductions when making this computation. Use Section B ofSchedule SE to figure your net earnings and SE tax. Caution: If you have an approved exemption, or you are automatically exempt,do not include the income or deductions from qualified services infiguring your net earnings from self-employment. For more information on net earnings from self-employment, getPublication 533. Gross income.To figure your net earnings from self-employment (on Schedule SE(Form 1040)), include in gross income: Salaries and fees for your qualified services (discussedearlier), hotel rooms AlbuferiaOfferings you receive for marriages, baptisms, funerals,masses, etc., The value of meals and lodging provided to you, your spouse,and your dependents for your employers convenience, The fair rental value of a parsonageprovided to you (includingthe cost of utilities that are furnished) and the rental allowance(including an amount for payment of utilities) paid to you, and Any amount a church pays toward your income tax or SE tax,other than withholding the amount from your salary. This amount isalso subject to income tax. Example.Pastor Roger Adams receives an annual salary of $16,500 as afull-time minister. The $16,500 includes $1,500 that is designated asa rental allowance to pay utilities. His church owns a parsonage thathas a fair rental value of $5,200 per year. Pastor Adams is given theuse of the parsonage. He is not exempt from SE tax. He must include$21,700 ($16,500 plus $5,200) when figuring net earnings fromself-employment. The results would be the same if, instead of the use of theparsonage and receipt of the rental allowance for utilities, PastorAdams had received an annual salary of $21,700 of which $6,700 ($1,500plus $5,200) per year was designated as a rental allowance. For the income tax treatment of these amounts, see Exclusionof Rental Allowance and Fair Rental Value of a Parsonage underIncome Tax: Income and Expenses, later. Overseas duty.Your net earnings from self-employment are determined without anyforeign earned income exclusion or the foreign housing exclusion ordeduction if you are a U.S. citizen or resident alien who is servingabroad and living in a foreign country. Example.Paul Jones was the minister of a U.S. church in Mexico. He earned$22,000 and was able to exclude it all for income tax purposes underthe foreign earned income exclusion. However, Mr. Jones must include$22,000 when figuring net earnings from self-employment. For information on excluding foreign earned income or the foreignhousing amount, get Publication 54, Tax Guide for U.S. Citizensand Resident Aliens Abroad. Specified U.S. possessions.The exclusion from gross income for amounts derived in Guam,American Samoa, or the Commonwealth of the Northern Mariana Islandsdoes not apply in computing net earnings from self-employment. Alsosee Residents of Puerto Rico, the Virgin Islands, Guam, andAmerican Samoa, earlier, under U.S. Citizens, Resident andNonresident Aliens. Amounts not included in gross income.Do not include the following amounts in gross income when figuringyour net earnings from self-employment. Offerings that others made to the church. Contributions by your church to an annuity plan set up foryou, including any salary reduction, that are not included in yourgross income. Pension payments or retirement allowances you receive foryour past qualified services. Allowable deductions.When figuring your net earnings from self-employment, deduct allyour nonemployee ministerial expenses. Also, deduct all your allowableunreimbursed trade or business expenses that you incur in performingministerial services as a common law employee of the church. Includethis net amount on line 2 of Schedule SE (Form 1040). Reimbursement arrangements.If you received an advance, allowance, or reimbursement for yourexpenses, how you report this amount and your expenses depends onwhether the reimbursement was paid to you under an accountable plan ora nonaccountable plan. If you are not sure if you are reimbursed froman accountable plan or a nonaccountable plan, ask your employer. Accountable plans.To be an accountable plan, your employers reimbursement arrangementmust include all three of the following rules. Your expenses must have a business connection -- thatis, you must have paid or incurred deductible expenses whileperforming services as an employee of your employer. You must adequately account to your employer for theseexpenses within a reasonable period of time. You must return any excess reimbursement or allowance withina reasonable period of time. Generally, if your expenses equal your reimbursement, you have nodeduction and the reimbursement is not reported on your FormW-2. If your expenses are more than your reimbursement, you candeduct your excess expenses for SE tax and income tax purposes. Nonaccountable plan.A nonaccountable plan is a reimbursement arrangement that does notmeet one or more of the three rules listed under Accountableplans. In addition, even if your employer has an accountableplan, the following payments will be treated as being paid under anonaccountable plan. Excess reimbursements you fail to return to youremployer. Reimbursement of nondeductible expenses related to youremployers business. Your employer will combine any reimbursement paid to you under anonaccountable plan with your wages, salary, or other compensation.Your employer will report the combined total in box 1 of your FormW-2. You can deduct your related expenses (for SE and income taxpurposes) regardless of whether they are more than, less than, orequal to your reimbursement. For more information on accountable and nonaccountable plans getPublication 463, Travel, Entertainment, Gift, and Car Expenses. Husband and WifeMissionary Team If a husband and wife are both duly ordained, commissioned, orlicensed ministers of a church and have an agreement that each willperform specific services for which they are paid jointly orseparately, they must divide the SE income according to the agreement. If the agreement is with one spouse only and the other spouse isnot paid for any specific duties, amounts received for their servicesare included in only the SE income of the spouse having the agreement. Maximum Earnings Subject to SE Tax For 1999, the maximum net earnings from self-employment subject tosocial security (old age, survivor, and disability insurance) tax is$72,600 minus any wages and tips you earned that were subject tosocial security tax. The tax rate is 12.4%. All of your net earningsare subject to the Medicare (hospital insurance) part of the SE tax.The tax rate is 2.9%. Optional Methods You may be able to use an optional method for figuring your netearnings from self-employment. In general, the optional methods areintended to permit continued coverage for social security and Medicarepurposes when your income for the tax year is low. There is an optional method for farmers and an optional method fornonfarm businesses. If you are in farm and nonfarm businesses, you mayqualify for both options. Farm optional method.If you are in the farming business, you may be able to use the farmoptional method. For more information on the farm optional method, seePublication 533. Nonfarm optional method.You may use the nonfarm optional method for nonfarm SE income ifyou meet all of the following tests. Your net nonfarm profits are less than $1,733. Your net nonfarm profits are less than 72.189% of your totalgross income from nonfarm self-employment. You are self-employed or a partner on a regular basis. Thismeans that your actual net earnings from self-employment are $400 ormore in at least 2 of the 3 tax years before the one for which you usethis method. You have not previously used this method more than 4 years(there is a 5-year lifetime limit). The years do not have to beconsecutive. If you meet these four tests, you may report the smaller oftwo-thirds of the gross income from your nonfarm business, or $1,600as your net earnings from self-employment. Caution: You may not report less than your actual net earnings from nonfarmself-employment.