Publication 533 |
2001 Tax Year |
Figuring Earnings Subject to Self-Employment Tax
Generally, you need to figure your total earnings subject to SE tax
before you can figure your net earnings from self-employment. This
section will help you figure these total earnings.
Sole proprietor or independent contractor.
If you are self-employed as a sole proprietor or independent
contractor (see Are You Self-Employed, earlier), use
Schedule C or C-EZ (Form 1040) to figure your earnings subject
to SE tax. For information about figuring earnings on Schedule C or
C-EZ, see Publication 334.
Commercial fishermen should also see
Publication 595.
Direct sellers should see Publication 911.
Farmer.
If you are self-employed as a farmer, use Schedule F (Form 1040) to
figure your earnings subject to SE tax. For information about figuring
earnings on Schedule F, see Publication 225.
Partner.
If you are self-employed as a member of a partnership, use
information from your Schedule K-1 (Form 1065) or (Form
1065-B) to figure your earnings subject to SE tax. For more
information, see Partnership Income or Loss, later.
Church employee.
If you are a church employee who must pay SE tax (see Who Must
Pay Self-Employment Tax, earlier), use information from your
Form W-2 to figure your earnings subject to SE tax. For more
information, see the Schedule SE instructions.
Minister, Christian Science practitioner, or member of
religious order.
If you are a minister, Christian Science practitioner, or member of
a religious order who must pay SE tax (see Minister, Christian
Science Practitioner, or Member of Religious Order, earlier),
see Publication 517
for information about figuring your earnings
subject to SE tax.
More Than One Business
If you have earnings subject to SE tax from more than one trade,
business, or profession, you must combine the net profit (or loss)
from each to determine your total earnings subject to SE tax. A loss
from one business reduces your profit from another business.
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 earnings subject to SE tax 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.
Gain or Loss
Do not include in earnings subject to SE tax 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 earnings subject to SE tax.
- Investment property.
- Depreciable property or other fixed assets used in your
trade or business.
- Livestock held for draft, breeding, sport, or dairy 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
earnings subject to SE tax 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,
Sales and Other Dispositions of Assets.
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 earnings subject to SE
tax. If you are not working when you receive the payment, it still
relates to your business and is included in earnings subject to SE
tax, 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 earnings subject to SE
tax. 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, the partnership should report your earnings subject to SE
tax on line 15a of your Schedule K-1 (Form 1065) or in box 9 of
your Schedule K-1 (Form 1065-B). The partnership can use
the worksheet in the form instructions to figure these earnings.
If you are a general partner, you may need to reduce these reported
earnings by amounts you claim as a section 179 deduction, unreimbursed
partnership expenses, or depletion on oil and gas properties.
If the amount reported is a loss, include only the deductible
amount when you figure your total earnings subject to SE tax.
For more information, see the Partner's Instructions for
Schedule K-1. For general information on partnerships, see
Publication 541.
Limited partner.
If you are a limited partner, your partnership earnings are
generally not subject to SE tax. However, guaranteed payments you
receive for services you perform for the partnership are subject to SE
tax and should be reported to you on line 15a or in box 9 of your
Schedule K-1.
Retired partner.
If you are a retired partner, retirement income you receive 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. A
partnership must report business income and expenses on
Form 1065, U.S. Return
of Partnership Income, along with Schedules K-1 showing
each partner's share of the earnings. Both of you must report the
earnings on Form 1040 and file a separate Schedule SE (Form 1040) to
report your individual SE tax.
However, if your spouse is your employee, not your partner, you
must withhold and pay social security and Medicare taxes for him or
her. For more information about employment taxes, see Publication 15.
Investment club partner.
If you are a member of an investment club partnership, your share
of the club's earnings is not included in earnings subject to SE tax
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 earnings subject to SE tax.
Do not treat any of your share as 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 2001 your partnership earnings subject to SE
tax for the fiscal year ending January 31, 2001.
Death of a partner.
When a partner dies, his or her partnership earnings subject to SE
tax are 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 earnings subject
to SE tax for the year are treated as though they were 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) partnership earnings subject to SE tax for the year of
death are $12,000. That partner's SE income from the partnership is
$8,000 ( 8/12 × $12,000).
Corporate Director, Employee,
or Shareholder
This section provides information to help you determine whether
your earnings are subject to SE tax if you are one of the following.
- A corporate director.
- A corporate employee or officer.
- A shareholder or officer of an S corporation.
Corporate director.
Fees you receive for performing services as a director of a
corporation are subject to SE tax. 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 earnings are not subject to SE tax, even though you
include them 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 of
social security and Medicare taxes and is not subject to SE tax,
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 earnings subject to SE tax 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 subject to SE tax. However, rent you receive from real
estate held for speculation or investment is not subject to SE tax.
Trailer park owner.
Rental income from a trailer park is subject to SE tax if you are a
self-employed 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 subject to SE tax 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 are 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.
U.S. Possession Self-Employment Income
If you have income from self-employment in a U.S. possession,
include it in earnings subject to SE tax 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 earnings subject to SE tax.
More information.
For more information on income from 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 earnings subject to SE tax. Tips received for similar services as
an employee are also not included in earnings subject to SE tax.
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