Table of Contents
- What's New for 2008
- What's New for 2009
- Introduction
- Topics - This chapter discusses:
- Useful Items - You may want to see:
- Why Pay Self-Employment Tax?
- How To Pay Self-Employment Tax
- Who Must Pay Self-Employment Tax?
- Figuring Self-Employment Earnings
- Methods for Figuring Net Earnings
- Reporting Self-Employment Tax
Tax rates and maximum net earnings. The maximum net self-employment earnings subject to the social security part (12.4%) of the self-employment tax increased to $102,000 for 2008. There is no maximum limit on earnings subject to the Medicare part (2.9%).
Conservation Reserve Program (CRP) payments. For payments made after 2007, CRP payments are excluded from self-employment tax for individuals receiving social security benefits for retirement or disability. See the Instructions for Schedule SE (Form 1040).
Optional methods to figure net earnings. For tax years beginning after 2007, the amount of gross and net income from self-employment you may have when using the farm optional method or nonfarm optional method has increased. This allows electing taxpayers to secure up to four credits of social security benefits coverage. In future years, the thresholds will be indexed to maintain that level of coverage. See Methods for Figuring Net Earnings.
Maximum net earnings. The maximum net self-employment earnings subject to the social security part of the self-employment tax increased to $106,800 for 2009. There is no maximum limit on earnings subject to the Medicare part.
Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of most wage earners.
You usually have to pay SE tax if you are self-employed. You are usually self-employed if you operate your own farm on land you either own or rent. You have to figure SE tax on Schedule SE (Form 1040).
Farmers who have employees may have to pay the employer's share of social security and Medicare taxes, as well. See chapter 13 for information on employment taxes.
-
Why pay self-employment tax
-
How to pay self-employment tax
-
Who must pay self-employment tax
-
Figuring self-employment earnings
-
Landlord participation in farming
-
Methods for figuring net earnings
-
Reporting self-employment tax
Publication
-
541 Partnerships
Form (and Instructions)
-
1040 U.S. Individual Income Tax Return
-
Sch F (Form 1040) Profit or Loss From Farming
-
Sch SE (Form 1040) Self-Employment Tax
-
1065 U.S. Return of Partnership Income
-
Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc.
See chapter 16 for information about getting publications and forms.
Social security benefits are available to self-employed persons just as they are to wage earners. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits.
For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest Social Security Administration (SSA) office or visit the SSA website at www.socialsecurity.gov.
Making false statements to get or to increase social security benefits may subject you to penalties.To pay SE tax, you must have a social security number (SSN) or an individual taxpayer identification number (ITIN). This section explains how to:
-
Obtain an SSN or ITIN, and
-
Pay your SE tax using estimated tax.
An ITIN does not entitle you to social security benefits. Obtaining an ITIN does not change your immigration or employment status under U.S. law.
You must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more.
The SE tax rules apply no matter how old you are and even if you are already receiving social security or Medicare benefits.-
You produce a crop or raise livestock on land belonging to another person.
-
Your share of the crop or livestock, or the proceeds from their sale, depends on the amount produced.
Example.
A share farmer produces a crop on land owned by another person on a 60-40 crop-share basis. Under the terms of their agreement, the share farmer furnishes the labor and half the cost of seed and fertilizer. The landowner furnishes the machinery and equipment used to produce and harvest the crop, and half the cost of seed and fertilizer. The share farmer is provided a house in which to live. The landowner and the share farmer decide how much of the tract should be planted in cotton and how much in other crops.
The share farmer is a self-employed farmer for purposes of the agreement to produce the cotton and other crops, and the share farmer's part of the profit or loss from the crops is reported on Schedule F (Form 1040) and included in self-employment earnings.
-
Investment property.
-
Depreciable property or other fixed assets used in your trade or business.
-
Livestock held for draft, breeding, sport, or dairy purposes, and not held primarily for sale, regardless of how long the livestock was held, or whether it was raised or purchased.
-
Unharvested standing crops sold with land held more than 1 year.
-
Timber, coal, or iron ore held for more than 1 year if an economic interest was retained, such as a right to receive coal royalties.
-
The retired partner performs no services for the partnership during the year.
-
The retired partner is owed only the retirement payments.
-
The retired partner's share (if any) of the partnership capital was fully paid to the retired partner.
-
The payments to the retired partner are lifelong periodic payments.
As a general rule, income and deductions from rentals and from personal property leased with real estate are not included in determining self-employment earnings. However, income and deductions from farm rentals, including government commodity program payments received by a landowner who rents land, are included if the rental arrangement provides that the landowner will, and does, materially participate in the production or management of production of the farm products on the land.
-
You do any three of the following.
-
Pay, using cash or credit, at least half the direct costs of producing the crop or livestock.
-
Furnish at least half the tools, equipment, and livestock used in the production activities.
-
Advise or consult with your tenant.
-
Inspect the production activities periodically.
-
-
You regularly and frequently make, or take an important part in making, management decisions substantially contributing to or affecting the success of the enterprise.
-
You work 100 hours or more spread over a period of 5 weeks or more in activities connected with agricultural production.
-
You do things that, considered in their totality, show you are materially and significantly involved in the production of the farm commodities.
Example.
Drew Houston agrees to produce a crop on J. Clarke's cotton farm with each receiving half the proceeds. Clarke advises Houston when to plant, spray, and pick the cotton. During the growing season, Clarke inspects the crop every few days to determine whether Houston is properly taking care of the crop. Houston furnishes all labor needed to grow and harvest the crop.
The management decisions made by J. Clarke in connection with the care of the cotton crop and his regular inspection of the crop establish that he participates to a material degree in the cotton production operations. The income Clarke receives from his cotton farm is included in his self-employment 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 earlier.
-
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.)
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 $6,300 or less.
-
Your net farm profits are less than $4,548.
-
Schedule F (Form 1040), line 11, and
-
Schedule K-1 (Form 1065), box 14, code B (from farm partnerships).
-
Schedule F (Form 1040), line 36, and
-
Schedule K-1 (Form 1065), box 14, code A (from farm partnerships).
Table12-1. Figuring Farm Net Earnings
IF your gross farm income is ... |
THEN your net earnings are equal to... |
$6,300 or less | Two-thirds of your gross farm income. |
More than $6,300 | $4,200. |
Example.
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.
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 $4,200 as your combined net earnings from self-employment.
Use Schedule SE (Form 1040) to figure and report your SE tax. Then, enter the SE tax on line 57 of Form 1040 and attach Schedule SE to Form 1040.
Most taxpayers can use Section A–Short Schedule SE to figure their SE tax. However, certain taxpayers must use Section B–Long Schedule SE. Use the chart on page 1 of Schedule SE to find out which one to use.
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.More Online Publications |