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Irsform1040x Publication 1212 - Additional Material Prev  Up  Next   Home   More Online Publications
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The Irsform1040x

Irsform1040x 10. Irsform1040x   Self-Employment (SE) Tax Table of Contents Who Must Pay SE Tax?Special Rules and Exceptions Figuring Earnings Subject to SE Tax Farm Optional Method Using Both Optional Methods Reporting Self-Employment Tax The SE tax rules apply no matter how old you are and even if you are already receiving social security and Medicare benefits. Irsform1040x Who Must Pay SE Tax? Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Irsform1040x Use Schedule SE to figure net earnings from self-employment. Irsform1040x Sole proprietor or independent contractor. Irsform1040x   If you are self-employed as a sole proprietor or independent contractor, you generally use Schedule C or C-EZ (Form 1040) to figure your earnings subject to SE tax. Irsform1040x SE tax rate. Irsform1040x    For 2013, the SE tax rate on net earnings is 15. Irsform1040x 3% (12. Irsform1040x 4% social security tax plus 2. Irsform1040x 9% Medicare tax). Irsform1040x Maximum earnings subject to self-employment tax. Irsform1040x    Only the first $113,700 of your combined wages, tips, and net earnings in 2013 is subject to any combination of the 12. Irsform1040x 4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax. Irsform1040x   All of your combined wages, tips, and net earnings in 2013 are subject to any combination of the 2. Irsform1040x 9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax. Irsform1040x   If your wages and tips are subject to either social security or railroad retirement (tier 1) tax, or both, and total at least $113,700, do not pay the 12. Irsform1040x 4% social security part of the SE tax on any of your net earnings. Irsform1040x However, you must pay the 2. Irsform1040x 9% Medicare part of the SE tax on all your net earnings. Irsform1040x Special Rules and Exceptions Aliens. Irsform1040x   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. Irsform1040x S. Irsform1040x citizens. Irsform1040x Nonresident aliens are not subject to SE tax unless an international social security agreement in effect determines that they are covered under the U. Irsform1040x S. Irsform1040x social security system. Irsform1040x However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. Irsform1040x S. Irsform1040x residents for self-employment tax purposes. Irsform1040x For more information on aliens, see Publication 519, U. Irsform1040x S. Irsform1040x Tax Guide for Aliens. Irsform1040x Child employed by parent. Irsform1040x   You are not subject to SE tax if you are under age 18 and you are working for your father or mother. Irsform1040x Church employee. Irsform1040x    If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you are subject to SE tax if you receive $108. Irsform1040x 28 or more in wages from the church or organization. Irsform1040x For more information, see Publication 517, Social Security and Other Information for Members of the Clergy and Religious Workers. Irsform1040x Fishing crew member. Irsform1040x   If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply. Irsform1040x You do not get any pay for the work except your share of the catch or a share of the proceeds from the sale of the catch, unless the pay meets all the following conditions. Irsform1040x The pay is not more than $100 per trip. Irsform1040x The pay is received only if there is a minimum catch. Irsform1040x The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry. Irsform1040x You get a share of the catch or a share of the proceeds from the sale of the catch. Irsform1040x Your share depends on the amount of the catch. Irsform1040x The boat's operating crew normally numbers fewer than 10 individuals. Irsform1040x (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10. Irsform1040x ) Notary public. Irsform1040x   Fees you receive for services you perform as a notary public are reported on Schedule C or C-EZ but are not subject to self-employment tax (see the Instructions for Schedule SE (Form 1040)). Irsform1040x State or local government employee. Irsform1040x   You are subject to SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement. Irsform1040x Foreign government or international organization employee. Irsform1040x   You are subject to SE tax if both the following conditions are true. Irsform1040x You are a U. Irsform1040x S. Irsform1040x citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands, or the Virgin Islands by: A foreign government, A wholly-owned agency of a foreign government, or An international organization. Irsform1040x Your employer is not required to withhold social security and Medicare taxes from your wages. Irsform1040x U. Irsform1040x S. Irsform1040x citizen or resident alien residing abroad. Irsform1040x    If you are a self-employed U. Irsform1040x S. Irsform1040x citizen or resident alien living outside the United States, in most cases you must pay SE tax. Irsform1040x Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion. Irsform1040x Exception. Irsform1040x    The United States has social security agreements with many countries to eliminate double taxation under two social security systems. Irsform1040x Under these agreements, you generally must only pay social security and Medicare taxes to the country in which you live. Irsform1040x The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country. Irsform1040x   For more information, see the Instructions for Schedule SE (Form 1040). Irsform1040x More Than One Business If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. Irsform1040x A loss from one business reduces your profit from another business. Irsform1040x Community Property Income If any of the income from a trade or business, other than a partnership, is community property income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. Irsform1040x Gain or Loss Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. Irsform1040x It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. Irsform1040x Lost Income Payments If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. Irsform1040x If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive. Irsform1040x Figuring Earnings Subject to SE Tax Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. Irsform1040x The regular method. Irsform1040x The nonfarm optional method. Irsform1040x The farm optional method. Irsform1040x You must use the regular method unless you are eligible to use one or both of the optional methods. Irsform1040x Why use an optional method?    You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. Irsform1040x You want to receive credit for social security benefit coverage. Irsform1040x You incurred child or dependent care expenses for which you could claim a credit. Irsform1040x (An optional method may increase your earned income, which could increase your credit. Irsform1040x ) You are entitled to the earned income credit. Irsform1040x (An optional method may increase your earned income, which could increase your credit. Irsform1040x ) You are entitled to the additional child tax credit. Irsform1040x (An optional method may increase your earned income, which could increase your credit. Irsform1040x ) Effects of using an optional method. Irsform1040x   Using an optional method could increase your SE tax. Irsform1040x Paying more SE tax could result in your getting higher benefits when you retire. Irsform1040x   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 tax or no tax using the regular method. Irsform1040x   The optional methods may be used only to figure your SE tax. Irsform1040x To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax. Irsform1040x Regular Method Multiply your total earnings subject to SE tax by 92. Irsform1040x 35% (. Irsform1040x 9235) to get your net earnings under the regular method. Irsform1040x See Short Schedule SE, line 4, or Long Schedule SE, line 4a. Irsform1040x Net earnings figured using the regular method are also called actual net earnings. Irsform1040x Nonfarm Optional Method Use the nonfarm optional method only for earnings that do not come from farming. Irsform1040x You may use this method if you meet all the following tests. Irsform1040x You are self-employed on a regular basis. Irsform1040x 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. Irsform1040x The net earnings can be from either farm or nonfarm earnings or both. Irsform1040x You have used this method less than 5 years. Irsform1040x (There is a 5-year lifetime limit. Irsform1040x ) The years do not have to be one after another. Irsform1040x Your net nonfarm profits were: Less than $5,024, and Less than 72. Irsform1040x 189% of your gross nonfarm income. Irsform1040x Net nonfarm profits. Irsform1040x   Net nonfarm profit generally is the total of the amounts from: Line 31, Schedule C (Form 1040), Line 3, Schedule C-EZ (Form 1040), Box 14, code A, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J1, Schedule K-1 (Form 1065-B). Irsform1040x   However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. Irsform1040x Gross nonfarm income. Irsform1040x   Your gross nonfarm income generally is the total of the amounts from: Line 7, Schedule C (Form 1040), Line 1, Schedule C-EZ (Form 1040), Box 14, code C, Schedule K-1 (Form 1065) (from nonfarm partnerships), and Box 9, code J2, Schedule K-1 (Form 1065-B). Irsform1040x Figuring Nonfarm Net Earnings If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method. Irsform1040x Table 10-1. Irsform1040x Figuring Nonfarm Net Earnings IF your gross nonfarm income is. Irsform1040x . Irsform1040x . Irsform1040x THEN your net earnings are equal to. Irsform1040x . Irsform1040x . Irsform1040x $6,960 or less Two-thirds of your gross nonfarm income. Irsform1040x More than $6,960 $4,640 Actual net earnings. Irsform1040x   Your actual net earnings are 92. Irsform1040x 35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92. Irsform1040x 35% (. Irsform1040x 9235) to get actual net earnings). Irsform1040x Actual net earnings are equivalent to net earnings figured using the regular method. Irsform1040x Optional net earnings less than actual net earnings. Irsform1040x   You cannot use this method to report an amount less than your actual net earnings from self-employment. Irsform1040x Gross nonfarm income of $6,960 or less. Irsform1040x   The following examples illustrate how to figure net earnings when gross nonfarm income is $6,960 or less. Irsform1040x Example 1. Irsform1040x Net nonfarm profit less than $5,024 and less than 72. Irsform1040x 189% of gross nonfarm income. Irsform1040x Ann Green runs a craft business. Irsform1040x Her actual net earnings from self-employment were $800 in 2011 and $900 in 2012. Irsform1040x She meets the test for being self-employed on a regular basis. Irsform1040x She has used the nonfarm optional method less than 5 years. Irsform1040x Her gross income and net profit in 2013 are as follows: Gross nonfarm income $5,400 Net nonfarm profit $1,200 Ann's actual net earnings for 2013 are $1,108 ($1,200 × . Irsform1040x 9235). Irsform1040x Because her net profit is less than $5,024 and less than 72. Irsform1040x 189% of her gross income, she can use the nonfarm optional method to figure net earnings of $3,600 (2/3 × $5,400). Irsform1040x Because these net earnings are higher than her actual net earnings, she can report net earnings of $3,600 for 2013. Irsform1040x Example 2. Irsform1040x Net nonfarm profit less than $5,024 but not less than 72. Irsform1040x 189% of gross nonfarm income. Irsform1040x Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. Irsform1040x She must use the regular method to figure her net earnings. Irsform1040x She cannot use the nonfarm optional method because her net profit is not less than 72. Irsform1040x 189% of her gross income. Irsform1040x Example 3. Irsform1040x Net loss from a nonfarm business. Irsform1040x Assume that in Example 1 Ann has a net loss of $700. Irsform1040x She can use the nonfarm optional method and report $3,600 (2/3 × $5,400) as her net earnings. Irsform1040x Example 4. Irsform1040x Nonfarm net earnings less than $400. Irsform1040x Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. Irsform1040x In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400. Irsform1040x Gross nonfarm income of more than $6,960. Irsform1040x   The following examples illustrate how to figure net earnings when gross nonfarm income is more than $6,960. Irsform1040x Example 1. Irsform1040x Net nonfarm profit less than $5,024 and less than 72. Irsform1040x 189% of gross nonfarm income. Irsform1040x John White runs an appliance repair shop. Irsform1040x His actual net earnings from self-employment were $10,500 in 2011 and $9,500 in 2012. Irsform1040x He meets the test for being self-employed on a regular basis. Irsform1040x He has used the nonfarm optional method less than 5 years. Irsform1040x His gross income and net profit in 2013 are as follows: Gross nonfarm income $12,000 Net nonfarm profit $1,200 John's actual net earnings for 2013 are $1,108 ($1,200 × . Irsform1040x 9235). Irsform1040x Because his net profit is less than $5,024 and less than 72. Irsform1040x 189% of his gross income, he can use the nonfarm optional method to figure net earnings of $4,640. Irsform1040x Because these net earnings are higher than his actual net earnings, he can report net earnings of $4,640 for 2013. Irsform1040x Example 2. Irsform1040x Net nonfarm profit not less than $5,024. Irsform1040x Assume that in Example 1 John's net profit is $5,400. Irsform1040x He must use the regular method. Irsform1040x He cannot use the nonfarm optional method because his net nonfarm profit is not less than $5,024. Irsform1040x Example 3. Irsform1040x Net loss from a nonfarm business. Irsform1040x Assume that in Example 1 John has a net loss of $700. Irsform1040x He can use the nonfarm optional method and report $4,640 as his net earnings from self-employment. Irsform1040x Farm Optional Method Use the farm optional method only for earnings from a farming business. Irsform1040x See Publication 225 for information about this method. Irsform1040x Using Both Optional Methods If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your net earnings from self-employment. Irsform1040x To figure your net earnings using both optional methods, you must: Figure your farm and nonfarm net earnings separately under each method. Irsform1040x Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method. Irsform1040x Add the net earnings figured under each method to arrive at your total net earnings from self-employment. Irsform1040x You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. Irsform1040x If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. Irsform1040x Example. Irsform1040x You are a self-employed farmer. Irsform1040x You also operate a retail grocery store. Irsform1040x Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 10-2. Irsform1040x Table 10-2. Irsform1040x Example—Farm and Nonfarm Earnings Income and Earnings Farm Nonfarm Gross income $3,000 $6,000 Actual net earnings $900 $500 Optional net earnings (2/3 of gross income) $2,000 $4,000 Table 10-3 shows four methods or combinations of methods you can use to figure net earnings from self-employment using the farm and nonfarm gross income and actual net earnings shown in Table 10-2. Irsform1040x Method 1. Irsform1040x Using the regular method for both farm and nonfarm income. Irsform1040x Method 2. Irsform1040x Using the optional method for farm income and the regular method for nonfarm income. Irsform1040x Method 3. Irsform1040x Using the regular method for farm income and the optional method for nonfarm income. Irsform1040x Method 4. Irsform1040x Using the optional method for both farm and nonfarm income. Irsform1040x Note. Irsform1040x Actual net earnings is the same as net earnings figured using the regular method. Irsform1040x Table 10-3. Irsform1040x Example—Net Earnings Net Earnings 1 2 3 4 Actual  farm $ 900   $ 900   Optional  farm   $ 2,000   $ 2,000 Actual nonfarm $ 500 $ 500     Optional nonfarm     $4,000 $4,000 Amount you can report: $1,400 $2,500 $4,900 $4,640* *Limited to $4,640 because you used both optional methods. Irsform1040x Fiscal Year Filer If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Irsform1040x Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year. Irsform1040x Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. Irsform1040x Then enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. Irsform1040x Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. Irsform1040x However, certain taxpayers must use Section B—Long Schedule SE. Irsform1040x If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. Irsform1040x Joint return. Irsform1040x   Even if you file a joint return, you cannot file a joint Schedule SE. Irsform1040x This is true whether one spouse or both spouses have earnings subject to SE tax. Irsform1040x If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. Irsform1040x However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. Irsform1040x Attach both schedules to the joint return. Irsform1040x More than one business. Irsform1040x   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. Irsform1040x A loss from one business will reduce your profit from another business. Irsform1040x File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business. Irsform1040x Example. Irsform1040x You are the sole proprietor of two separate businesses. Irsform1040x You operate a restaurant that made a net profit of $25,000. Irsform1040x You also have a cabinetmaking business that had a net loss of $500. Irsform1040x You must file a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500. Irsform1040x You file Schedule SE showing total earnings subject to SE tax of $24,500. Irsform1040x Prev  Up  Next   Home   More Online Publications