Who Must Pay Self-Employment Tax?

You must pay SE tax and file Schedule SE if either of the following applies.

1. You were self-employed and your net earnings from self-employment (excluding income described in (2)) were $400 or more.
2. You performed services for a church as an employee and received income of $108.28 or more.

The SE tax rules apply no matter how old you are and even if you are already getting social security or Medicare benefits.

Aliens. Resident aliens are generally subject to the same rules as U.S. citizens. Nonresident aliens do not pay SE tax. Residents of the Virgin Islands, Puerto Rico, Guam, the CNMI, or American Samoa, however, are subject to the tax. For SE tax purposes, they are not nonresident aliens.

Church employee. If you work for a church or a qualified church-controlled organization (other than as a minister or member of a religious order) that elected an exemption from social security and Medicare taxes, you must pay SE tax if you receive $108.28 or more in wages from the church or organization.

However, you can elect to be exempt from SE taxes if you are a member of a qualifying religious sect. See Member of Recognized Religious Sect, later. Both you and your employer must receive an approved copy of the application for exemption from social security coverage before the exemption can take effect. Employees use Form 4029 to apply for an exemption.

State or local government employee. You must pay SE tax if you are an employee of a state or local government, are paid solely on a fee basis, and your services are not covered under a federal-state social security agreement.

Foreign government or international organization employee. You are subject to SE tax if both the following conditions are true.

1. You are a U.S. citizen employed in the United States, Puerto Rico, Guam, American Samoa, the Commonwealth of the Northern Mariana Islands (CNMI), or the Virgin Islands by:
   1. A foreign government,
   2. A wholly-owned instrumentality of a foreign government, or
   3. An international organization.
2. Your employer does not deduct social security and Medicare taxes from your income.

U.S. citizen or resident alien residing abroad. If you are a self-employed U.S. citizen or resident alien living outside the United States, in most cases you must pay SE tax. Do not reduce your foreign earnings from self-employment by your foreign earned income exclusion.

Exception. The United States has social security (totalization) agreements with many countries to eliminate double taxation under two social security systems. (See Table 1.) Under these bilateral agreements, you must generally pay social security and Medicare taxes to only the country you live in. The country to which you must pay the tax will issue a certificate which serves as proof of exemption from social security tax in the other country.

Table 1. Countries with Social Security Agreements

More information. For more information, contact the social security agency of the country in which you are living, visit the United States Social Security Administration web site at www.ssa.gov/international, or you can write to:

Social Security Administration
Office of International Programs
P.O. Box 17741
Baltimore, MD 21235-7741

Are You Self-Employed?

You are self-employed if any of the following apply to you.

1. You carry on a trade or business as a sole proprietor or an independent contractor.
2. You are a member of a partnership that carries on a trade or business.
3. You are otherwise in business for yourself.

Trade or business. A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. The regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.

Part-time business. You do not have to carry on regular full-time business activities to be self-employed. Having a part-time business in addition to your regular job or business may also be self-employment.

Example. You are employed full time as a engineer at the local plant. You fix televisions and radios during the weekends. You have your own shop, equipment, and tools. You get your customers from advertising and word-of-mouth. The income you earn from your repair shop is SE income.

Sole proprietor. You are a sole proprietor if you own an unincorporated business by yourself.

Independent contractor. People such as lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally not employees. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. Income earned by a person who is working as an independent contractor is SE income. However, whether those people are independent contractors or employees depends on the facts in each case.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed. If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your income is not subject to SE tax.

More information. For more information on determining whether you are an independent contractor or an employee, see Publication 15-A.

Guidelines for Selected Occupations

This section provides information to help you determine whether your income from one of the following occupations is subject to SE tax.

• Retired or former insurance agent.
• Fishing crew member.
• Newspaper carrier or distributor.
• Notary public.
• Public official.
• Real estate agent or direct seller.
• Dealer in securities.
• Executor or administrator.
• Minister or member of religious order.
• Member of recognized religious sect.
• Trader in securities.

Retired Insurance Agent

Income paid by an insurance company to a retired insurance agent based on a percentage of commissions received before retirement is SE income. Also, renewal commissions and deferred commissions for sales made before retirement are generally SE income.

However, renewal commissions paid to the survivor of an insurance agent are not SE income.

Former Insurance Agent

Certain termination payments made to a former insurance agent by an insurance company for services performed for that company are exempt from SE tax if all the following requirements are met.

• The payments are made after December 31, 1997.
• The payments are received after the agent's agreement to perform services for the company has ended.
• The agent performs no services for the company after the service agreement ends and before the end of the tax year.
• The agent enters into a covenant not to compete against the company for at least the 1-year period beginning on the date the service agreement ended.
• The payment depends primarily on policies sold by or credited to the account of the agent during the last year of the service agreement or on the extent to which those policies remain in force for some period after the service agreement ends, or both.
• The amount of the payment does not depend to any extent on the length of service or overall earnings from services performed for the company (regardless of whether eligibility for payment depends on length of service).

Fishing Crew Member

If you are a member of the crew on a boat that catches fish or other water life, you are self-employed if all the following conditions apply.

1. You do not get any pay for the work except your share of the catch or the proceeds from the sale of the catch, unless the pay meets all the following conditions.
   1. The pay is not more than $100 per trip.
   2. The pay is received only if there is a minimum catch.
   3. The pay is solely for additional duties (such as mate, engineer, or cook) for which additional cash pay is traditional in the fishing industry.
2. You get a share of the catch or a share of the proceeds from the sale of the catch.
3. Your share depends on the amount of the catch.
4. The boat's operating crew normally numbers fewer than 10 individuals. (An operating crew is considered as normally made up of fewer than 10 if the average size of the crew on trips made during the last four calendar quarters is fewer than 10.)

More information. For more information, see Publication 595, Tax Highlights for Commercial Fishermen.

Newspaper Carrier or Distributor

A special rule applies to services you perform as a newspaper carrier or distributor.

Treated as self-employed. You are a direct seller and you are treated as self-employed for federal tax purposes if all the following conditions apply.

1. You are in the business of delivering/distributing newspapers or shopping news, including directly related services such as soliciting customers and collecting receipts.
2. Substantially all your pay for these services directly relates to sales or other output rather than to the number of hours worked.
3. You perform the delivery services under a written contract between you and the service recipient that states you will not be treated as an employee for federal tax purposes.

This rule applies whether or not you hire others to help you make deliveries. It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver.

Treated as an employee. If you do not meet the above conditions, you may be an employee subject to having taxes withheld from your pay. As an employee, you would not have to pay SE tax on this income. Wages newspaper carrier employees receive for delivering newspapers or shopping news to customers are subject to withholding for social security and Medicare taxes if the carrier is 18 or over. See Publication 15-A for more information about who is an employee.

Carrier, distributor, or vendor under age 18. Your income is not subject to SE tax if you are under age 18 and you are a newspaper carrier or distributor (who does not deliver or distribute to any point for subsequent delivery or distribution) or a vendor (who works under a buy-sell arrangement).

Notary Public

Fees received for services performed as a notary public are not subject to SE tax.

Public Official

Public officials generally do not pay SE tax on what they earn for serving in public office. This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these.

Exception. Public officials of state or local governments must pay SE tax on their fees if they are paid solely on a fee basis and if their services are eligible for, but not covered by, social security under a federal-state agreement.

Real Estate Agent or Direct Seller

If you are a licensed real estate agent or a direct seller, you may be treated as self-employed if both the following apply.

• Substantially all your pay for services as a real estate agent or direct seller is directly related to sales or other output rather than to hours worked.
• The services are performed under a written contract that provides the real estate agent or direct seller will not be treated as an employee for federal tax purposes. As a self-employed real estate agent or direct seller, your income is subject to SE tax.

For more information, see Publication 15-A. Direct sellers should also see Publication 911.

Dealer in Securities

If you are a dealer in options and commodities, you must figure net earnings from self-employment by including gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, and dealer equity options) or property related to those contracts, such as stock used to hedge options. See sections 1256 and 1402(i) of the Internal Revenue Code for more information.

Executor or Administrator

If you administer a deceased person's estate, your fees are included in net earnings from self-employment if you are one of the following.

1. A professional fiduciary.
2. A nonprofessional fiduciary (personal representative), and:
   1. The estate includes an active trade or business in which you actively participate, and
   2. Your fees are related to the operation of that trade or business.
3. A nonprofessional fiduciary of a single estate that requires extensive managerial activities on your part for a long period of time, provided these activities are enough to be considered a trade or business.

Report fees that are included in net earnings on Schedule C or C-EZ. If the fees are not included in net earnings, report them on line 21 of Form 1040.

Minister or Member of Religious Order

In most cases, you must pay SE tax on salaries and other income for services you performed as a minister, Christian Science practitioner, or member of a religious order who has not taken a vow of poverty. But you can get an exemption from SE tax on certain earnings by filing Form 4361.

For more information on getting an exemption, see Publication 517.

Revocation of exemption from SE tax. If you previously elected the exemption from social security coverage and SE tax, you now have from January 1, 2000, to April 15, 2002, to revoke this exemption by filing Form 2031 with the IRS. This period is extended beyond April 15, 2002, if you get an extension to file your 2001 return. The revocation will be effective for the year the revocation was made (2000 or 2001) and for all later years. You will be covered under the social security system and your earnings will be subject to SE tax during those years. Once you revoke the exemption, you can never again elect an exemption from SE tax and social security coverage.

Member of religious order who has taken a vow of poverty. If you belong to a religious order and took a vow of poverty, you are automatically exempt from SE tax for amounts received while working for a church or an integral agency of the church. However, amounts you receive for performing services for an organization other than the church are not exempt from SE tax.

Member of Recognized Religious Sect

If you belong to a recognized religious sect opposed to insurance, you may qualify for an exemption from the SE tax. To qualify, you must be conscientiously opposed to accepting the benefits of any public or private insurance that makes payments because of death, disability, old age, retirement, or medical care, or that provides services for medical care. If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. Religious opposition based on sect teachings is the only legal basis for the exemption. In addition, your religious sect (or division) must have existed since December 31, 1950.

To get the exemption, you must file in triplicate Form 4029 and waive all social security benefits.

Trader in Securities

You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. As a trader in securities, your gain or loss from the disposition of securities is not taken into account when you figure net earnings from self-employment. However, see Dealer in Securities, earlier, for an exception that applies to section 1256 contracts. For more information about traders in securities, see Publication 550.

What Are Net Earnings From Self-Employment?

The net profit subject to SE tax is called net earnings from self-employment. Your net profit is shown on the lines of the following schedules:

Some of the types of income you include in net earnings from self-employment are discussed next.

Community Income

If any of the income from a trade or business, other than a partnership, is community income under state law, it is included in the net earnings of the spouse carrying on the trade or business. The identity of the spouse carrying on the trade or business is determined by the facts in each case.

Dividends

Include dividends on securities you own in net earnings from self-employment if you are a dealer in securities who is not holding the securities for speculation or investment.

Gain or Loss

Do not include in net earnings a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. For example, gains or losses from the disposition of the following types of property are not included in net earnings.

• Investment property.
• Depreciable property or other fixed assets used in your trade or business.
• Livestock held for draft, dairy, breeding, or sporting purposes and not held primarily for sale, regardless of how long the livestock were held or whether they were raised or purchased.
• Standing crops sold with land held more than one year.
• Timber, coal, or iron ore held for more than one year, if an economic interest was retained, such as a right to receive coal royalties.

A gain or loss from the cutting of timber is not included in net earnings if the cutting is treated as a sale or exchange. For more information on electing to treat the cutting of timber as a sale or exchange, see Timber in chapter 2 of Publication 544.

Interest Income

Include in net earnings from self-employment interest income you receive in the ordinary course of your trade or business. This includes interest you receive on the following items.

1. Notes or accounts receivable.
2. Loans (if you are in the business of making loans).
3. Bonds, notes, or other debt issued with interest coupons or in registered form by a corporation or governmental entity if:
   1. You are a dealer in stocks or securities, and
   2. You do not hold the securities for speculation or investment.

Lost Income Payments

If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in net earnings from self-employment. If you are not working when you receive the payment, it still relates to your business and is included in net earnings, even though your business is temporarily inactive.

If there is a connection between any payment you receive and your trade or business, the payment is included in net earnings. A connection exists if it is clear the payment would not have been made but for your conduct of the trade or business.

Partnership Income or Loss

If you are a member of a partnership that carries on a trade or business, your distributive share of its income or loss from the trade or business is included in your net earnings from self-employment. Guaranteed payments from your partnership should be included, along with your share of income or losses, when you figure your net earnings from self-employment.

For information on partnerships, see Publication 541.

Inactive partner. If you are an inactive partner, your net earnings from self-employment include your distributive share of partnership income (or loss) and any guaranteed payments.

Limited partner. If you are a limited partner, your net earnings from self-employment include guaranteed payments, such as salary and professional fees received for services performed during the year. They do not include the distributive share of partnership income (or loss).

Retired partner. If you are a retired partner, your retirement income received from the partnership under a written plan is not subject to SE tax if all the following apply.

• You receive lifelong periodic payments.
• Your share of the partnership capital was fully paid to you.
• You did not perform any services for the partnership during the year.
• You are owed nothing but the retirement payments by the partnership.

Husband and wife partners. If you and your spouse join together in the conduct of a business and share in the profits and losses, you have created a partnership. The partnership must report the business income and expenses on Form 1065, U.S. Return of Partnership Income, along with Schedule K-1 showing each partner's share of the net income. Both of you must report the net income on Form 1040 and file separate Schedules SE (Form 1040) to report your individual SE tax.

However, if your spouse is your employee, not your partner, you must pay social security and Medicare taxes for him or her. For more information, see Publication 15.

Investment club partner. If you are a member of an investment club partnership, your share of the club's income is not included in net earnings from self-employment if the club limits its activities to the following activities.

• Investing in savings certificates, stock, or securities.
• Collecting interest or dividends for its members' accounts.

Community income from a partnership. If you are a partner and your distributive share of any income or loss from a trade or business carried on by the partnership is community income, treat your share as your net earnings from self-employment. Do not treat any of your share as net earnings of your spouse.

Different tax years. If your tax year is not the same as your partnership's, report your share of partnership income (or loss) on your return for the year that includes the end of the partnership tax year.

Example. You file your return on a calendar year basis, but your partnership uses the fiscal year ending January 31. You must include on your return for calendar year 2000 your distributive share of partnership earnings and your guaranteed payments for the fiscal year ending January 31, 2000.

Death of a partner. When a partner dies, his or her distributive share of partnership income (or loss) is figured through the end of the month in which the death occurs. This is true even though the decedent's estate or heirs may succeed to rights in the partnership. The partnership income (or loss) for the year is treated as though it was earned in equal amounts each month.

Example. ABC Partnership operates a business. Its tax year ends on December 31. A partner dies on August 18. The deceased partner's (and his or her estate's) distributive share of partnership income for the year of death is $12,000. That partner's SE income from the partnership is $8,000 ( 8/12 x $12,000).

Corporate Director, Employee, or Shareholder

This section provides information to help you determine whether your income is subject to SE tax if you are one of the following.

• Corporate director.
• Corporate employee or officer.
• Shareholder or officer of an S corporation.

Corporate director. Fees you receive for performing services as a director of a corporation are included in net earnings from self-employment. It does not matter whether the fees are for going to directors' meetings or for serving on committees.

Corporate employee or officer. Even if you own most or all of the stock of a corporation, your income as an employee or officer of the corporation is not subject to SE tax.

S corporation shareholder and officer. If you are a shareholder in an S corporation, your share of the corporation's taxable income is not SE income, even though you include it in your gross income for income tax purposes.

If you are a shareholder and also an officer of an S corporation and perform substantial services, you are an employee of the S corporation. Your payment for services is subject to withholding for social security and Medicare taxes and is not SE income, regardless of what the S corporation calls the payments.

Real Estate Rent

Rental income from real estate and personal property leased with real estate is not included in net earnings from self-employment unless either of the following applies to you.

• You are a real estate dealer.
• You provide services for your tenants.

Real estate dealer. You are a real estate dealer if you are engaged in the business of selling real estate to customers with the purpose of making a profit from those sales. Rent you receive from real estate held for sale to customers is included in net earnings from self-employment. However, rent you receive from real estate held for speculation or investment is not SE income.

Trailer park owner. Rental income from a trailer park is included in net earnings from self-employment if you are a trailer park owner who provides trailer lots and facilities and substantial services for the convenience of your tenants.

You generally are considered to provide substantial services for tenants if they are primarily for the tenants' convenience and are not normally provided to maintain the lots in a condition for occupancy. Services are substantial if the compensation for the services makes up a material part of the tenants' rental payments.

Examples of services that are for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers.

Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways.

Hotels, boarding houses, and apartments. Rental income you receive for the use or occupancy of hotels, boarding houses, or apartment houses is included in net earnings from self-employment if you provide services for the occupants.

Generally, you are considered to provide services for the occupants if the services are primarily for their convenience and not services normally provided with the rental of rooms for occupancy only. An example of a service provided for the convenience of the occupants is maid service. However, providing heat and light, cleaning stairways and lobbies, and collecting trash are not services primarily for the occupants' convenience.

Depreciation Recapture

If you recaptured any depreciation, including any section 179 deduction, because the business use of certain property was reduced to 50% or less, these recaptured amounts are included in net earnings from self-employment. This rule does not apply to amounts recaptured on the disposition of property. For more information, see the instructions for Form 4797, Sales of Business Property.

U.S. Possession Self-Employment Income

If you have income from self-employment in a U.S. possession, include it in net earnings from self-employment, even if your U.S. possession income is exempt from U.S. income tax.

Places treated as U.S. possessions. The following places are treated as U.S. possessions.

• Guam
• American Samoa
• The Virgin Islands
• The Commonwealth of
  the Northern Mariana Islands
• Puerto Rico

Form to file. Use the following table to select the appropriate form to file to report your net earnings.

Table 2. Form to File

More information. For more information on U.S. citizens in U.S. possessions, see Publication 570, Tax Guide for Individuals With Income From U.S. Possessions.

Research Grant

If you receive payments under a research grant and perform services for the grantor as an independent contractor, the payments you receive are subject to SE tax.

For more information about whether you are an independent contractor, see Independent contractor, earlier.

Wages, Salaries, and Tips

Wages and salaries received for services performed as an employee and covered by social security or railroad retirement are not included in net earnings. Tips received for similar services as an employee are not included in net earnings.

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