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IRS.gov Website
Publication 225
taxmap/pubs/p225-053.htm#en_us_publink1000218765

Methods for Figuring Net Earnings(p75)

rule
There are three ways to figure your net earnings from self-employment.
  1. The regular method.
  2. The farm optional method.
  3. 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.
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Figure 12-1. Can I Use the Optional Methods?

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Why use an optional method?(p75)

rule
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.
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Effects of using an optional method.(p76)

rule
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.
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Regular Method(p76)

rule
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."
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Farm Optional Method(p76)

rule
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.
  1. Your gross farm income is $6,960 or less.
  2. Your net farm profits are less than $5,024.
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Gross farm income.(p76)

rule
Your gross farm income is the total of the amounts from:
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Net farm profits.(p76)

rule
Net farm profits generally are the total of the amounts from: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, earlier.
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Figuring farm net earnings.(p76)

rule
If you meet either of the two tests explained above, use Table 12-1. Figuring Farm Net Earnings, to figure your net earnings from self-employment under the farm optional method.

Table 12-1. Figuring Farm Net Earnings

IF your gross farm income
is...
THEN your net earnings are equal to...
$6,960 or lessTwo-thirds of your gross farm income.
More than $6,960$4,640
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Optional method can reduce or eliminate SE tax.(p76)

rule
If your gross farm income is $6,960 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.
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Example.(p76)

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.
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Nonfarm Optional Method(p77)

rule
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.
EIC
You cannot combine farm and nonfarm self-employment earnings to figure your net earnings under either of the optional methods.
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Using Both Optional Methods(p77)

rule
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 $4,640 as your combined net earnings from self-employment.