How to become insured under social security.   You must be insured under the social security system before you begin receiving social security benefits. You are insured if you have the required number of credits (also called quarters of coverage).

Earning credits in 2004.   You can earn a maximum of four credits per year. For 2004, you earn one credit for each $900 of income subject to social security taxes. You need $3,600 ($900 × 4) of self-employment income and wages to earn four credits in 2004. It does not matter whether the income is earned in one quarter or is spread over two or more quarters.

The Social Security Administration (SSA) time limit for posting self-employment income.   Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.

Obtaining a social security number.   If you never had an SSN, apply for one using Form SS-5, Application for a Social Security Card. The application is also available in Spanish. You can get this form at any Social Security office or by calling 1-800-772-1213.

  

You can also download Form SS-5 from the Social Security Administration web site at www.ssa.gov.

  If you have a social security number from the time you were an employee, you must use that number. Do not apply for a new one.

Replacing a lost social security card.   If you have a number but lost your card, file Form SS-5. You will get a new card showing your original number, not a new number.

Name change.   If your name has changed since you received your social security card, complete Form SS-5 to report a name change.

Obtaining an individual taxpayer identification number.   The IRS will issue you an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN. To apply for an ITIN, file Form W-7, Application for IRS Individual Taxpayer Identification Number. The application is also available in Spanish. You can get this form by calling 1-800-829-3676.

  

You can also download Form W-7 from the IRS website at www.irs.gov.

Paying estimated tax.   Estimated tax is the method used to pay tax (including SE tax) on income not subject to withholding. You generally have to make estimated tax payments if you expect to owe tax, including SE tax, of $1,000 or more when you file your return. Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay the tax.

  However, if at least two-thirds of your gross income for 2004 or 2005 was from farming and you file your 2005 Form 1040 and pay all the tax due by March 1, 2006, you do not have to pay any estimated tax. For more information about estimated tax for farmers, see Publication 505, Tax Withholding and Estimated Tax .

Penalty for underpayment of estimated tax.   You may have to pay a penalty if you do not pay enough estimated tax by its due date.

Are you self-employed?   You are self-employed if you carry on a trade or business (such as running a farm) as a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit.

Share farmer.   You are a self-employed farmer under an income-sharing arrangement if both the following apply. Your income from the income-sharing arrangement is your SE income.

  If you produce a crop or livestock on land belonging to another person and are to receive a specified rate of pay, a fixed sum of money, or a fixed quantity of the crop or livestock, and not a share of the crop or livestock or their proceeds, you may be either self-employed or an employee of the landowner. This will depend on whether the landlord has the right to direct or control your performance of service.

4-H Club or FFA project.   If an individual participates in a 4-H Club or FFA project, any net income received from sales or prizes related to the project may be subject to income tax. Report the net income on line 21 of Form 1040. If necessary, attach a statement showing the gross income and expenses. The net income may not be subject to SE tax if the project is primarily for educational purposes and not for profit, and is completed by the individual under the rules and economic restrictions of the sponsoring 4-H or FFA organization. Such a project is generally not considered a trade or business.

Partners in a partnership.   Generally, you are self-employed if you are a member of a partnership that carries on a trade or business.

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 in Box 14 of your Schedule K-1.

Husband and wife partners.   You and your spouse may operate a farm as a partnership. If you and your spouse operate a farm as partners, report farm income and expenses on Form 1065, and attach separate Schedules K-1 showing each partner's share of earnings. Each spouse must report his or her share of partnership earnings on Form 1040 and file a separate Schedule SE (Form 1040) to report 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 chapter 13.

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.

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 chapter 15.

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 in box 14, code A, of your Schedule K-1 (Form 1065). Box 14 of Schedule K-1 may also provide amounts for gross farming or fishing income (code B) and gross non-farm income (code C). Use these amounts if you use the farm or nonfarm optional method to figure net earnings from self-employment (see Methods for Figuring Net Earnings, later).

  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.

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 net 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 farm 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.

Lost income payments.   Lost income payments received from insurance or other sources for reducing or stopping farming activities are included in earnings subject to SE. These include USDA payments to compensate for lost income resulting from reductions in tobacco quotas and allotments. Even if you are not farming when you receive the payment, it is included in earnings subject to SE tax if it relates to your farm business (even though it is temporarily inactive). A connection exists if it is clear the payment would not have been made but for your conduct of your farm business.

Gain or loss.   A gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers is not included in earnings subject to SE tax. It does not matter whether the disposition is a sale, exchange, or 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.

   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 8.

Wages and salaries.   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.

  Wages paid in kind to you for agricultural labor, such as commodity wages, are not included in earnings subject to SE tax.

Retired partner.   Retirement income received by a partner from his or her partnership under a written plan is not included in earnings subject to SE tax if all the following apply.

As a general rule, income and deductions from rentals and from personal property leased with real estate are not included in determining earnings subject to SE tax. However, income and deductions from farm rentals, including government commodity program payments received by a landowner who rents land, are included if the rental arrangement provides that the landlord will, and does, materially participate in the production or management of production of the farm products on the land.

Why use an optional method?   You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies.

Effects of using an optional method.   Using an optional method could increase your SE tax. Paying more SE tax can result in your getting higher benefits when you retire.

  If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller SE tax or no SE tax using the regular method.

  The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax.

Multiply your total earnings subject to SE tax by 92.35% (.9235) to get your net earnings under the regular method. See Short Schedule SE, line 4, or Long Schedule SE, line 4a.

Net earnings figured using the regular method are also called “actual net earnings.”

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.

This is an optional method available for determining net earnings from nonfarm self-employment, much like the farm optional method.

If you are also engaged in a nonfarm business, you may be able to use this method to compute your earnings subject to SE tax from your nonfarm business. You can use this method even if you do not use the farm optional method for determining your earnings subject to SE tax and even if you have a net loss from your nonfarm business. For more information about the nonfarm optional method, see Publication 533.

You cannot combine farming income with nonfarm income from self-employment to figure your earnings subject to SE tax under either of the optional methods.

If you use both optional methods, you must 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.

Self-employment tax deduction.   You can deduct half of your SE tax in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your SE tax.

  To deduct the tax, enter on Form 1040, line 30, the amount shown on the Deduction for one-half of self-employment tax line of the Schedule SE.

Joint return.   Even 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. Your spouse is not considered self-employed just because you are. 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 Who Must Pay Self-Employment Tax.