Taxmap/pubs/p533-003.htm#TXMP0d8699d6
Methods for Figuring  
Net Earnings

Table 3. Can I Use the Optional Methods?  

Taxmap/pubs/p533-003.htm#TXMP3a6645a3 Effects of using an optional method.

Using an optional method could increase your SE tax. Paying more SE tax can result in your getting higher benefits when you retire.

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.

The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax.

Taxmap/pubs/p533-003.htm#TXMP68f59150 Regular Method

Regular Method

Multiply your total earnings subject to SE tax 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/p533-003.htm#TXMP36b762df Nonfarm Optional Method

Use the nonfarm optional method only for earnings that do not come from farming. You may use this 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 one after another.
3. Your net nonfarm profits were:
   1. Less than $1,733, and
   2. Less than 72.189% of your gross nonfarm income.

Taxmap/pubs/p533-003.htm#TXMP7396a48b Net nonfarm profits.

Net nonfarm profits 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 K1, Schedule K-1 (Form 1065-B).

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.

Taxmap/pubs/p533-003.htm#TXMP6eafa27a Gross nonfarm income.

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 K2, Schedule K-1 (Form 1065-B).

Taxmap/pubs/p533-003.htm#TXMP69529727 Figuring Nonfarm Net Earnings

SE tax

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.

Table 3. Figuring Nonfarm Net Earnings

IF your gross nonfarm income is ...	THEN your net earnings are equal to ...
$2,400 or less	The greater of: Two-thirds of your gross nonfarm income, or Actual net earnings. *
More than $2,400	The greater of: $1,600, or Actual net earnings. *

* If actual net earnings (defined below) are greater, you  cannot use the nonfarm optional method.

Taxmap/pubs/p533-003.htm#TXMP563ee578 Actual net earnings.

Your actual net earnings are 92.35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92.35% (.9235) to get actual net earnings). Actual net earnings are equivalent to net earnings figured using the regular method.

Taxmap/pubs/p533-003.htm#TXMP7911ae0a Optional net earnings less than actual net earnings.

You cannot use this method to report an amount less than your actual net earnings from self-employment.

Taxmap/pubs/p533-003.htm#TXMP4261dd3c Gross nonfarm income of $2,400 or less.

The following examples illustrate how to figure net earnings when gross nonfarm income is $2,400 or less.

Taxmap/pubs/p533-003.htm#TXMP4858bffb
Example 1—net nonfarm profit less than $1,733 and less than 72.189% of gross nonfarm income.

Ann Green runs a craft business. Her actual net earnings from self-employment were $800 in 2002 and $900 in 2003. She meets the test for being self-employed on a regular basis. She has used the nonfarm optional method less than 5 years. Her gross income and net profit in 2004 are as follows:

Gross nonfarm income	$2,100
Net nonfarm profit	$1,200

Ann's actual net earnings for 2004 are $1,108 ($1,200 × .9235). Because her net profit is less than $1,733 and less than 72.189% of her gross income, she can use the nonfarm optional method to figure net earnings of $1,400 (2/3 × $2,100). Because these net earnings are higher than her actual net earnings, she can report net earnings of $1,400 for 2004.

Taxmap/pubs/p533-003.htm#TXMP23407a70
Example 2—net nonfarm profit less than $1,733 but not less than 72.189% of gross nonfarm income.

Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. She must use the regular method to figure her net earnings. She cannot use the nonfarm optional method because her net profit is not less than 72.189% of her gross income.

Taxmap/pubs/p533-003.htm#TXMP623a30e2
Example 3—net loss from a nonfarm business.

Assume that in Example 1 Ann has a net loss of $700. She can use the nonfarm optional method and report $1,400 (2/3 × $2,100) as her net earnings.

Taxmap/pubs/p533-003.htm#TXMP347db700
Example 4—nonfarm net earnings less than $400.

Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. 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.

Taxmap/pubs/p533-003.htm#TXMP6f319cd7 Gross nonfarm income of more than $2,400.

The following examples illustrate how to figure net earnings when gross nonfarm income is more than $2,400.

Taxmap/pubs/p533-003.htm#TXMP610e0d3d
Example 1—net nonfarm profit less than $1,733 and less than 72.189% of gross nonfarm income.

John White runs an appliance repair shop. His actual net earnings from self-employment were $10,500 in 2002 and $9,500 in 2003. He meets the test for being self-employed on a regular basis. He has used the nonfarm optional method less than 5 years. His gross income and net profit in 2004 are as follows:

Gross nonfarm income	$12,000
Net nonfarm profit	$1,200

John's actual net earnings for 2004 are $1,108 ($1,200 × .9235). Because his net profit is less than $1,733 and less than 72.189% of his gross income, he can use the nonfarm optional method to figure net earnings of $1,600. Because these net earnings are higher than his actual net earnings, he can report net earnings of $1,600 for 2004.

Taxmap/pubs/p533-003.htm#TXMP61a0ee39
Example 2—net nonfarm profit not less than $1,733.

Assume that in Example 1 John's net profit is $1,800. He must use the regular method. He cannot use the nonfarm optional method because his net nonfarm profit is not less than $1,733.

Taxmap/pubs/p533-003.htm#TXMP06ac6f18
Example 3—net loss from a nonfarm business.

Assume that in Example 1 John has a net loss of $700. He can use the nonfarm optional method and report $1,600 as his net earnings from self-employment.

Taxmap/pubs/p533-003.htm#TXMP520ecf13 Farm Optional Method

Farm Optional Method

Use the farm optional method only for earnings from a farming business. You can use this method if you meet either of the following tests.

• Your gross farm income is $2,400 or less.
• Your net farm profits are less than $1,733.

Taxmap/pubs/p533-003.htm#TXMP7f8effc6 Net farm profits.

Net farm profits generally is the total of the amounts from:

• Line 36, Schedule F (Form 1040), and
• Box 14, code A, Schedule K-1 (Form 1065), (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, earlier.

Taxmap/pubs/p533-003.htm#TXMP13fd121c Gross farm income.

Your gross farm income is the total of the amounts from:

• Line 11, Schedule F (Form 1040), and
• Box 14, code B, Schedule K-1 (Form 1065), (from farm partnerships).

Taxmap/pubs/p533-003.htm#TXMP6ef9c84c Figuring Farm Net Earnings

SE tax

If you meet either of the two tests explained earlier, use the following table to figure your net earnings from self-employment under the farm optional method.

Table 4. Figuring Farm Net Earnings

IF your gross farm income is ...	THEN your net earnings are equal to...
$2,400 or less	Two-thirds of your gross farm income.
More than $2,400	The greater of: $1,600, or Actual net earnings. *

* If actual net earnings (defined below) are greater, you cannot  use the farm optional method.

Taxmap/pubs/p533-003.htm#TXMP0d6b8e01 Actual net earnings.

Your actual net earnings are 92.35% of your total earnings subject to SE tax (that is, multiply total earnings subject to SE tax by 92.35% (.9235) to get actual net earnings). Actual net earnings are equivalent to net earnings figured using the regular method.

Taxmap/pubs/p533-003.htm#TXMP5aad5239 Optional net earnings less than actual net earnings.

If your gross farm income is $2,400 or less and your farm net earnings are less than your actual net earnings, you can still use the farm optional method.

Taxmap/pubs/p533-003.htm#TXMP73229840
Example.

Your actual net earnings from farm self-employment are $425 and your net earnings figured under the farm optional method are $390. 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/p533-003.htm#TXMP153ae8ca Using Both Optional Methods

Optional Methods, Using Both

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.

To figure your net earnings using both optional methods, you must:

• Figure your farm and nonfarm net earnings separately under each method. Do not combine farm earnings with nonfarm earnings to figure your net earnings under either method.
• 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 $1,600 as your combined net earnings from self-employment.

Taxmap/pubs/p533-003.htm#TXMP68d067f8
Example.

You are a self-employed farmer. You also operate a retail grocery store. Your gross income, actual net earnings from self-employment, and optional farm and optional nonfarm net earnings from self-employment are shown in Table 5.

Table 5. Example - Farm and Nonfarm Earnings

Income and Earnings	Farm	Nonfarm
Gross income	$1,200	$1,500
Actual net earnings	$900	$500
Optional net earnings (2/3 of gross income)	$800	$1,000

Table 6 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 5.

• Method 1—Using the regular method for both farm and nonfarm income.
• Method 2—Using the optional method for farm income and the regular method for nonfarm income.
• Method 3—Using the regular method for farm income and the optional method for nonfarm income.
• Method 4—Using the optional method for both farm and nonfarm income.

Note. Actual net earnings is the same as net earnings figured using the regular method.

Table 6. Example - Net Earnings

Net Earnings	1	2	3	4
Actual farm	$ 900		$ 900
Optional farm		$ 800		$ 800
Actual nonfarm	$ 500	$ 500
Optional nonfarm			$1,000	$1,000
Amount you can report:	$1,400	$1,300	$1,900	$1,600*

*Limited to $1,600 because you used both optional methods.

Previous Page:  Publication 533 - Self-Employment Tax - Figuring Earnings Subject to Self-Employment Tax Next Page:  Publication 533 - Self-Employment Tax - Reporting Self-Employment Tax Use     to find additional instances of index items.