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.
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.
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.
Your net nonfarm profits were:
Less than $1,733, and
Less than 72.189% of your gross nonfarm income.
Net nonfarm profits.
Net nonfarm profit 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.
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-2 (Form 1065-B).
Figuring Nonfarm Net Earnings
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.
| IF your gross nonfarm income is ... | THEN your net earnings are equal to ... |
| $2,400 or less | Two-thirds of your gross nonfarm income. |
| More than $2,400 | $1,600 |
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.
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.
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.
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 2003 and $900 in 2004. 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 2005 are as follows:
| Gross nonfarm income | $2,100 |
| Net nonfarm profit | $1,200 |
Ann's actual net earnings for 2005 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 (⅔ × $2,100). Because these net earnings are higher than her actual net earnings, she can report net earnings of $1,400 for 2005.
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.
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 (⅔ × $2,100) as her net earnings.
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.
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.
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 2003 and $9,500 in 2004. 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 2005 are as follows:
| Gross nonfarm income | $12,000 |
| Net nonfarm profit | $1,200 |
John's actual net earnings for 2005 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 2005.
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.
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.
Information courtesy of the Internal Revenue Service.
Back to Self-Employment (SE) Tax
