Nonfarm Optional Method - [PDF]

Nonfarm Optional Method

You may be able to use the nonfarm optional method for figuring your net earnings from self-employment. In general, the nonfarm optional method is intended to permit continued coverage for social security and Medicare purposes when your income for the tax year is low.

You may use the nonfarm optional method if you meet all the following tests.

  1. 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.

  2. You have used this method less than 5 years. (There is a 5-year lifetime limit.) The years do not have to be consecutive.

  3. Your net nonfarm profits were:

    1. Less than $4,894, and

    2. Less than 72.189% of your gross nonfarm income.

If you meet the three tests, use Table 3 to figure your net earnings from self-employment under the nonfarm optional method.

Table 3.Figuring Nonfarm Net Earnings

IF your gross nonfarm income is ... THEN your net earnings are equal to ...
$6,780 or less Two-thirds of your gross nonfarm income.
More than $6,780 $4,520.

Actual net earnings. Multiply your total earnings subject to SE tax by 92.35% (.9235) to get actual net earnings. Actual net earnings are equivalent to net earnings under the “Regular Method.

More information. For more information on the nonfarm optional method, see Publication 334, Tax Guide for Small Business, and the Schedule SE (Form 1040) instructions.