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Figuring Earnings Subject to SE Tax • Section B, line 4a (if you use the Long Schedule SE).
Methods for Figuring Net Earnings Net earnings figured using the regular method are also
called actual net earnings.
There are three ways to figure net earnings from self-em-
ployment. Nonfarm Optional Method
1. The regular method. Use the nonfarm optional method only for earnings that do

2. The nonfarm optional method. not come from farming. You may use this method if you
3. The farm optional method. meet all the following tests.
1. You are self-employed on a regular basis. This means
You must use the regular method to the extent you do that your actual net earnings from self-employment
not use one or both of the optional methods. were $400 or more in at least 2 of the 3 tax years be-
Why use an optional method? You may want to use fore the one for which you use this method. For this
the optional methods (discussed later) when you have a purpose, the prior-year net earnings can be from ei-
loss or a small net profit and any one of the following ap- ther farm or nonfarm earnings or both.
plies. 2. You have used this method less than 5 years. (There
• You want to receive credit for social security benefit is a 5-year lifetime limit.) The years do not have to be
coverage. one after another.
• You incurred child or dependent care expenses for 3. Your net nonfarm profits were:
which you could claim a credit. (An optional method a. Less than $5,891, and
may increase your earned income, which could in-
crease your credit.) b. Less than 72.189% of your gross nonfarm income.
• You are entitled to the earned income credit. (An op- Net nonfarm profits. Net nonfarm profit generally is the
tional method may increase your earned income, total of the amounts from:
which could increase your credit.) • Line 31, Schedule C (Form 1040 or 1040-SR); and
• You are entitled to the additional child tax credit. (An
optional method may increase your earned income, • Box 14, code A, Schedule K-1 (Form 1065) (from non-
which could increase your credit.) farm partnerships).
However, you may need to adjust the amount reported
Effects of using an optional method. Using an optional on Schedule K-1 if you are a general partner or if it is a
method could increase your SE tax. Paying more SE tax loss.
could result in your getting higher benefits when you re-
tire. Gross nonfarm income. Your gross nonfarm income
Using the optional methods also may decrease your generally is the total of the amounts from:
adjusted gross income (AGI) due to the deduction for • Line 7, Schedule C (Form 1040 or 1040-SR); and
one-half of SE tax on Form 1040 or Form 1040-SR, which
may affect your eligibility for credits, deductions, or other • Box 14, code C, Schedule K-1 (Form 1065) (from non-
items that are subject to an AGI limit. Figure your AGI with farm partnerships).
and without using the optional methods to see if the op-
tional methods will benefit you. Figuring Nonfarm Net Earnings
If you use either or both optional methods, you must fig-
ure and pay the SE tax due under these methods even if If you meet the three tests explained earlier, use the fol-
you would have had a smaller tax or no tax using the regu- lowing table to figure your nonfarm net earnings from
lar method. self-employment under the nonfarm optional method.
The optional methods may be used only to figure your
SE tax. To figure your income tax, include your actual Table 10-1. Figuring Nonfarm Net Earnings
earnings in gross income, regardless of which method you
use to determine SE tax. IF your gross nonfarm THEN your net
income is... earnings are equal to...
Regular Method $8,160 or less Two-thirds of your gross

To figure net earnings using the regular method, multiply nonfarm income.
your self-employment earnings by 92.35% (0.9235). For More than $8,160 $5,440.
your net earnings figured using the regular method, see
one of the following lines on your Schedule SE (Form
1040 or 1040-SR). Optional net earnings less than actual net earnings.
• Section A, line 4 (if you use the Short Schedule SE). You cannot use this method to report an amount less than
your actual nonfarm net earnings from self-employment.

Page 42 Chapter 10 Self-Employment (SE) Tax