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.
- 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.)
Using an optional method could increase your SE tax. Paying more SE tax may result in you getting higher social security disability or retirement benefits.
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.taxmap/pubs/p225-053.htm#en_us_publink1000218770
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."taxmap/pubs/p225-053.htm#en_us_publink1000218771
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 $6,540 or less.
- Your net farm profits are less than $4,721.
Your gross farm income is the total of the amounts from:
- Schedule F (Form 1040), line 11, and
- Schedule K-1 (Form 1065), box 14, code B (from farm partnerships).
Net farm profits generally are the total of the amounts from:
- Schedule F (Form 1040), line 36, and
- Schedule K-1 (Form 1065), box 14, code A (from farm partnerships).
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. For more information, see Partnership income or loss
Table 12-1. Figuring Farm Net Earnings
|IF your gross farm income|
|THEN your net earnings are equal to...|
|$6,540 or less||Two-thirds of your gross farm income.|
|More than $6,540||$4,360.|
If your gross farm income is $6,540 or less and your farm net earnings figured under the farm optional method are less than your actual net earnings, you can use the farm optional method to reduce or eliminate your SE tax. Your actual net earnings are your net earnings figured using the regular method, explained earlier. taxmap/pubs/p225-053.htm#en_us_publink1000218777
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.taxmap/pubs/p225-053.htm#en_us_publink1000218778
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.
You cannot combine farm and nonfarm self-employment earnings to figure your net earnings under either of the optional methods.
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 $4,360 as your combined net earnings from self-employment.