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Publication 533
Self- Employment Tax

For use in preparing 2002 Returns

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.

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

  • Line 11, Schedule F (Form 1040), and
  • Line 15b, Schedule K-1 (Form 1065), (from farm partnerships).

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

  • Line 36, Schedule F (Form 1040), and
  • Line 15a, 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.

Figuring Farm Net Earnings

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 5. 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 are greater, you cannot use the farm  optional method.

Optional earnings less than actual 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. Your actual net earnings are your net earnings figured using the regular method, explained earlier.

Example.   Your actual net earnings from 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.

Using Both Optional Methods

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 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.

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 as follows.

Table 6. 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

You can figure your net earnings from self-employment in any of the four combinations shown below:

 

Table 7. Example — Net Earnings

Reporting Self-Employment Tax

Use Schedule SE (Form 1040) to figure and report your SE tax. Then enter the SE tax on line 56 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 (reproduced later) to find out which one to use.

CAUTION: If you have to pay SE tax, you must file a Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return.

Joint return.   If you file a joint return, you cannot file a joint Schedule SE. This is true whether one spouse or both spouses have earnings subject to SE tax. If both of you have earnings subject to SE tax, each of you must complete a separate Schedule SE. However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. Attach both schedules to the joint return. If you and your spouse operate a business as a partnership, see Husband and wife partners, earlier, under Partnership Income or Loss.

More than one business.   If you have more than one trade or business, you must combine the net profit (or loss) from each business to figure your SE tax. A loss from one business will reduce your profit from another business. File one Schedule SE showing the earnings from self-employment, but file a separate Schedule C, C-EZ, or F for each business.

Example.   You are the sole proprietor of two separate businesses. You operate a restaurant that made a net profit of $25,000. You also have a cabinetmaking business that had a net loss of $500. You file Schedule SE showing total earnings subject to SE tax of $24,500. You must also file a Schedule C for each business - a Schedule C for the restaurant showing your net profit of $25,000 and another Schedule C for the cabinetmaking business showing your net loss of $500.

Filled-In Form Examples

The following examples illustrate the use of the short and long forms of Schedule SE (Form 1040).

Short Schedule SE Example

The following example shows how Susan J. Brown fills out Section A - Short Schedule SE.

Background

Susan J. Brown is the sole proprietor of a dress shop, Milady Fashions. She received no wages and she does not own any other business. Her husband has no interest in her business. Her Schedule C (Form 1040) shows a net profit of $35,100 in 2002.

Completing Schedule SE

Susan's completed Schedule SE with Short Schedule SE filled out is shown later.

The following table describes how Susan completes each line on her schedule.

Table 8. Completing Short Schedule SE
Line Description
1 Susan has no farm income, so she leaves line 1 blank.
2 Susan enters the net profit from her Schedule C, $35,100.
3 Susan has no farm income, so she enters the same amount on line 3, $35,100.
4 Susan multiplies the $35,100 by 92.35% (.9235) to get her net earnings and enters $32,414.85.
5 Susan now figures her SE tax as follows:
  • She multiplies the $32,414.85 on line 4 by 15.3% (.153),
  • She enters the result, $4,959.47, on line 5 (this is the SE tax she owes), and
  • She also enters $4,959.47 on line 56 of Form 1040 (not illustrated).
6 Susan multiples $4,959.47 (from line 5) by 50% (.5) and enters the result ($2,479.74) on:
  • Line 6 of this schedule, and
  • Line 29 of Form 1040.

This is the SE tax she can deduct.

Schedule SE, page 1

If Susan Owned More Than One Business

If Susan were the sole proprietor of more than one business, she would have combined the profits and losses from all of them and completed a single Schedule SE.

If Susan Earned Wages

If, in addition to operating her dress shop, she had worked for wages and the total of her wages and her SE income was more than $84,900, she would have filled out Long Schedule SE.

If Susan's Husband Had
Income from Self-Employment

Susan's husband has no interest in her business and does not pay SE tax on this income. If her husband was a partner in the business or had other income subject to SE tax, he would file a separate Schedule SE.

Long Schedule SE Example

The following example illustrates how John Clarke fills out Section B - Long Schedule SE.

Background

John Clarke is single. He is employed as a full-time history professor at a local university. His wages from this job were $78,500. John also gives lectures around the country on a freelance basis. His net profit from these lectures was $15,000, which he reported on Schedule C-EZ (Form 1040), (not shown).

His net profit from lecturing and his wages total more than $84,900, so he must fill out Long Schedule SE.

Completing Schedule SE

John only needs to complete Part I of Long Schedule SE because he is not using an optional method.

John's completed Long Schedule SE is shown later. The following table describes how John completes each line.

Table 9. Completing Long Schedule SE
Line Description
1 John has no farm income, so he leaves line 1 blank.
2 John enters the net profit from his Schedule C-EZ, $15,000.
3 John has no farm income, so he enters the same amount on line 3, $15,000.
4a John multiplies the $15,000 by 92.35% (.9235) to get his net earnings and enters $13,852.50.
4b John did not elect an optional method, so he leaves this line blank.
4c Line 4b is blank, so he enters the same amount he entered on line 4a, $13,852.50.
5a 5b John had no church employee income. He leaves these lines blank.
6 Line 5b is blank, so John enters the same amount he entered on line 4c, $13,852.50.
8a John enters his total wages, $78,500.
8b This line does not apply to him, so John leaves it blank.
8c Line 8b is blank, so he enters the same amount he entered on line 8a, $78,500.
9 He subtracts line 8c ($78,500) from line 7 and enters the result, $6,400.
10 John multiplies the smaller of line 6 ($13,852.50) or line 9 ($6,400) by 12.4% (.124) and enters the result, $793.60.
11 John multiplies line 6 ($13,852.50) by 2.9% (.029) and enters the result, $401.72.
12 John adds lines 10 and 11 and enters the total, $1,195.32, here and on line 56 of Form 1040 (not illustrated).
13 John multiples line 12 (his SE tax) by 50% (.5) and enters the result ($597.66) on:
  • Line 13 of this schedule, and
  • Line 29 of Form 1040.

This is the SE tax he can deduct.

Schedule SE, page 2

How To Get Tax Help

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate.   If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

  • Call the Taxpayer Advocate at 1-877-777-4778.
  • Call, write, or fax the Taxpayer Advocate office in your area.
  • Call 1-800-829-4059 if you are a TTY/TDD user.

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

Free tax services.   To find out what services are available, get Publication 910, Guide to Free Tax Services. It contains a list of free tax publications and an index of tax topics. It also describes other free tax information services, including tax education and assistance programs and a list of TeleTax topics.

COMPUTE: Personal computer. With your personal computer and modem, you can access the IRS on the Internet at www.irs.gov. While visiting our web site, you can:

  • See answers to frequently asked tax questions or request help by e-mail.
  • Download forms and publications or search for forms and publications by topic or keyword.
  • Order IRS products on-line.
  • View forms that may be filled in electronically, print the completed form, and then save the form for recordkeeping.
  • View Internal Revenue Bulletins published in the last few years.
  • Search regulations and the Internal Revenue Code.
  • Receive our electronic newsletters on hot tax issues and news.
  • Learn about the benefits of filing electronically (IRS e-file).
  • Get information on starting and operating a small business.

You can also reach us with your computer using File Transfer Protocol at ftp.irs.gov.

FAX: TaxFax Service. Using the phone attached to your fax machine, you can receive forms and instructions by calling 703-368-9694. Follow the directions from the prompts. When you order forms, enter the catalog number for the form you need. The items you request will be faxed to you.

For help with transmission problems, call the FedWorld Help Desk at 703-487-4608.

PHONE: Phone. Many services are available by phone.
 
 

  • Ordering forms, instructions, and publications. Call 1-800-829-3676 to order current and prior year forms, instructions, and publications.
  • Asking tax questions. Call the IRS with your tax questions at 1-800-829-4933.
  • Solving problems. Take advantage of Everyday Tax Solutions service by calling your local IRS office to set up an in-person appointment at your convenience. Check your local directory assistance or www.irs.gov for the numbers.
  • TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1-800-829-4059 to ask tax questions or to order forms and publications.
  • TeleTax topics. Call 1-800-829-4477 to listen to pre-recorded messages covering various tax topics.


Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to sometimes listen in on or record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

WALKIN: Walk-in. Many products and services are available on a walk-in basis.

  • Products. You can walk in to many post offices, libraries, and IRS offices to pick up certain forms, instructions, and publications. Some IRS offices, libraries, grocery stores, copy centers, city and county governments, credit unions, and office supply stores have an extensive collection of products available to print from a CD-ROM or photocopy from reproducible proofs. Also, some IRS offices and libraries have the Internal Revenue Code, regulations, Internal Revenue Bulletins, and Cumulative Bulletins available for research purposes.
  • Services. You can walk in to your local IRS office to ask tax questions or get help with a tax problem. Now you can set up an appointment by calling your local IRS office number and, at the prompt, leaving a message requesting Everyday Tax Solutions help. A representative will call you back within 2 business days to schedule an in-person appointment at your convenience.

ENVELOPE: Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Find the address that applies to your part of the country.

  • Western part of U.S.:
    Western Area Distribution Center
    Rancho Cordova, CA 95743-0001
  • Central part of U.S.:
    Central Area Distribution Center
    P.O. Box 8903
    Bloomington, IL 61702-8903
  • Eastern part of U.S. and foreign addresses:
    Eastern Area Distribution Center
    P.O. Box 85074
    Richmond, VA 23261-5074

CDROM: CD-ROM for tax products. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:
 

  • Current tax forms, instructions, and publications.
  • Prior-year tax forms and instructions.
  • Popular tax forms that may be filled in electronically, printed out for submission, and saved for recordkeeping.
  • Internal Revenue Bulletins.

The CD-ROM can be purchased from National Technical Information Service (NTIS) by calling 1-877-233-6767 or on the Internet at http://www.irs.gov/cdorders. The first release is available in early January and the final release is available in late February.

CDROM: CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions, and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

It is available in March. You can get a free copy by calling 1-800-829-3676 or by visiting the website at www.irs.gov/smallbiz.