Methods for Figuring Net Earnings
There are three ways to figure your net earnings from self-employment.
The regular method.
The farm optional method.
The nonfarm optional method.
You must use the regular method unless you are eligible to use one or both of the optional methods. See Figure 12-1 , shown later.
You want to receive credit for social security benefit coverage.
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.)
You are entitled to the earned income credit. (An optional method may increase your earned income, which could increase your credit.)
You are entitled to the additional child tax credit. (An optional method may increase your earned income, which could increase your credit.)
If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller SE tax or no SE tax using the regular method.
The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual self-employment earnings in gross income, regardless of which method you use to determine SE tax.
Multiply your total self-employment earnings 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 farm optional method only for self-employment earnings from a farming business. You can use this method if you meet either of the following tests.
Your gross farm income is $6,840 or less.
Your net farm profits are less than $4,894.
Schedule F (Form 1040), line 9, and
Schedule K-1 (Form 1065), box 14, code B (from farm partnerships).
Schedule F (Form 1040), line 34, and
Schedule K-1 (Form 1065), box 14, code A (from farm partnerships).
Table 12-1.Figuring Farm Net Earnings
|IF your gross farm income
|THEN your net earnings are equal to...|
|$6,840 or less||Two-thirds of your gross farm income.|
|More than $6,840||$4,520|
Your gross farm income is $540 and your net farm profit is $460. Consequently, your net earnings figured under the farm optional method are $360 (2/3 of $540) and your actual net earnings are $425 (92.35% of $460). You owe no SE tax if you use the optional method because your net earnings under the farm optional method are less than $400.
This is an optional method available for determining net earnings from nonfarm self-employment, much like the farm optional method.
If you are also engaged in a nonfarm business, you may be able to use this method to figure your nonfarm net earnings. You can use this method even if you do not use the farm optional method for determining your farm net earnings and even if you have a net loss from your nonfarm business. For more information about the nonfarm optional method, see Publication 334.
If you use both optional methods, you must 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 $4,520 as your combined net earnings from self-employment.