Page 48 - Small Business Taxes

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• You are entitled to the additional child tax credit. (An However, you may need to adjust the amount reported
optional method may increase your earned income, on Schedule K-1 if you are a general partner or if it is a
which could increase your credit.) loss.
Effects of using an optional method. Using an optional Gross nonfarm income. Your gross nonfarm income is
method could increase your SE tax. Paying more SE tax generally the total of the amounts from:
could result in your getting higher benefits when you re- • Line 7 of Schedule C (Form 1040); and
tire.
Using the optional methods may also decrease your • Box 14, code C, of Schedule K-1 (Form 1065) (from
AGI due to the deduction for one-half of SE tax on Form nonfarm partnerships).
1040 or 1040-SR, which may affect your eligibility for
credits, deductions, or other items that are subject to an Figuring Nonfarm Net Earnings
AGI limit. Figure your AGI with and without using the op-
tional methods to see if the optional methods will benefit If you meet the three tests explained earlier, use the fol-
you. lowing table to figure your nonfarm net earnings from
If you use either or both optional methods, you must fig- self-employment under the nonfarm optional method.
ure and pay the SE tax due under these methods even if
you would have had a smaller tax or no tax using the regu- Table 10-1. Figuring Nonfarm Net Earnings
lar method.
The optional methods may be used only to figure your IF your gross nonfarm THEN your net
SE tax. To figure your income tax, include your actual income is... earnings are equal to...
earnings in gross income, regardless of which method you
use to determine SE tax. $9,060 or less two-thirds of your gross
nonfarm income.
Regular Method more than $9,060 $6,040.

To figure net earnings using the regular method, multiply
your self-employment earnings by 92.35% (0.9235). For Optional net earnings less than actual net earnings.
your net earnings figured using the regular method, see You cannot use this method to report an amount less than
line 4a of your Schedule SE (Form 1040). your actual nonfarm net earnings from self-employment.
Your actual nonfarm net earnings are your nonfarm net
Net earnings figured using the regular method are also earnings figured using the regular method, explained ear-
called actual net earnings. lier.

Nonfarm Optional Method Gross nonfarm income of $9,060 or less. The follow-
ing examples illustrate how to figure net earnings when
Use the nonfarm optional method only for earnings that do gross nonfarm income is $9,060 or less.
not come from farming. You may use this method if you
Example 1. Net nonfarm profit less than $6,540
meet all the following tests. and less than 72.189% of gross nonfarm income.
1. You are self-employed on a regular basis. This means Ann Green runs a craft business. Her actual net earnings
that your actual net earnings from self-employment from self-employment were $800 in 2020 and $900 in
were $400 or more in at least 2 of the 3 tax years be- 2021. She meets the test for being self-employed on a
fore the one for which you use this method. For this regular basis. She has used the nonfarm optional method
purpose, the prior-year net earnings can be from ei- less than 5 years. Her gross income and net profit in 2022
ther farm or nonfarm earnings or both. are as follows.
2. You have used this method less than 5 years. (There
is a 5-year lifetime limit.) The years do not have to be Gross nonfarm income . . . . . . . . . . . . . . . . . . . . . . $5,400
one after another. Net nonfarm profit . . . . . . . . . . . . . . . . . . . . . . . . . $1,200
3. Your net nonfarm profits were: Ann's actual net earnings for 2022 are $1,108 ($1,200
a. Less than $6,540, and × 0.9235). Because her net profit is less than $6,540 and
less than 72.189% of her gross income, she can use the
b. Less than 72.189% of your gross nonfarm income. nonfarm optional method to figure net earnings of $3,600
( /3 × $5,400). Because these net earnings are higher than
2
Net nonfarm profit. Net nonfarm profit is generally the her actual net earnings, she can report net earnings of
total of the amounts from: $3,600 for 2022.
• Line 31 of Schedule C (Form 1040); and Example 2. Net nonfarm profit less than $6,540 but
• Box 14, code A, of Schedule K-1 (Form 1065) (from not less than 72.189% of gross nonfarm income. As-
nonfarm partnerships). sume that in Example 1 Ann's gross income is $1,200 and
her net profit is $900. She must use the regular method to

Page 42 Chapter 10 Self-Employment (SE) Tax