Instructions for Form 1040 Schedule SE |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you are looking for information for the current tax year, go to the Tax Prep Help Area.
Net Earnings From Self-Employment
What Is Included in Net Earnings From Self-Employment?
In most cases, net earnings include your net profit from a farm or nonfarm business. If you were a partner in a partnership,
see the following
instructions.
Partnership Income or Loss
If you were a general or limited partner in a partnership, include on
line 1 or line 2, whichever applies, the amount of net earnings from self-employment from
Schedule K-1 (Form 1065), box 14, code A, and
Schedule K-1 (Form 1065-B), box 9, code J1. General partners should reduce this amount before entering it on Schedule SE by
any
section 179 expense deduction claimed, unreimbursed partnership expenses claimed, and depletion claimed on oil and gas properties.
If you reduce
the amount you enter on Schedule SE, attach an explanation.
If a partner died and the partnership continued, include in SE income the deceased's distributive share of the partnership's
ordinary income or
loss through the end of the month in which he or she died. See
section 1402(f).
If you were married and both you and your spouse were partners in a partnership, each of you must pay SE tax on your own share
of the partnership
income. Each of you must file a Schedule SE and report the partnership income or loss on
Schedule E (Form 1040), Part II, for income tax purposes.
SE income belongs to the person who is the member of the partnership and cannot be treated as SE income by the nonmember spouse,
even in community
property states.
You are considered self-employed if you produced crops or livestock on someone else's land for a share of the crops or livestock
produced (or a
share of the proceeds from the sale of them). This applies even if you paid another person (an agent) to do the actual work
or management for you.
Report your net earnings for income tax purposes on
Schedule F (Form 1040) and for SE tax purposes on
Schedule SE. See
Pub. 225 for details.
Other Income and Losses Included in Net Earnings From Self-Employment
-
Rental income from a farm if, as landlord, you materially participated in the production or management of the production of
farm products on
this land. This income is farm earnings. To determine whether you materially participated in farm management or production,
do not consider the
activities of any agent who acted for you. The material participation tests are explained in
Pub. 225.
-
Cash or a payment-in-kind from the Department of Agriculture for participating in a land diversion program.
-
Payments for the use of rooms or other space when you also provided substantial services. Examples are hotel rooms, boarding
houses, tourist
camps or homes, parking lots, warehouses, and storage garages.
-
Income from the retail sale of newspapers and magazines if you were
age 18 or older and kept the profits.
-
Amounts received by current or former self-employed insurance agents and salespersons that are:
-
Paid after retirement but figured as a percentage of commissions received from the paying company before retirement,
-
Renewal commissions, or
-
Deferred commissions paid after retirement for sales made before retirement.
However, certain termination payments received by former insurance salespersons are not included in net earnings from self-employment
(as explained
in
item 9 under
Income and Losses Not Included in Net Earnings From Self-Employment on
this page).
-
Income of certain crew members of fishing vessels with crews of normally
fewer than 10 people. See
Pub. 334 for details.
-
Fees as a state or local government employee if you were paid only on a fee basis and the job was not covered under a federal-state
social
security coverage agreement.
-
Interest received in the course of any trade or business, such as interest on notes or accounts receivable.
-
Fees and other payments received by you for services as a director of a corporation.
-
Recapture amounts under
sections 179 and 280F that you included in gross income because the business use of the property dropped to
50% or less. Do not include amounts you recaptured on the disposition of property. See
Form 4797.
-
Fees you received as a professional fiduciary. This may also apply to fees paid to you as a nonprofessional fiduciary if the
fees relate to
active participation in the operation of the estate's business, or the management of an estate that required extensive management
activities over a
long period of time.
-
Gain or loss from
section 1256 contracts or related property by an options or commodities dealer in the normal course of dealing in or trading
section 1256
contracts.
Income and Losses Not Included in Net Earnings From Self-Employment
-
Salaries, fees, etc., subject to social security or Medicare tax that you received for performing services as an employee,
including
services performed as a public official (except as a fee basis government employee as explained in
item 7 under
Other Income and Losses Included in Net Earnings From Self-Employment) or as an employee or employee representative under the railroad
retirement system.
-
Fees received for services performed as a notary public. If you had no other income subject to SE tax, enter
“Exempt—Notary” on
Form 1040, line 58; do not file Schedule SE. However, if you had other earnings of $400 or more subject to SE tax, enter
“Exempt—Notary” and the amount of your net profit as a notary public from
Schedule C or Schedule C-EZ on the
dotted line to the left of Schedule SE, line 3.
Subtract that amount from the total of
lines 1 and 2 and enter the result on
line 3.
-
Income you received as a retired partner under a written partnership plan that provides for lifelong periodic retirement payments
if you had
no other interest in the partnership and did not perform services for it during the year.
-
Income from real estate rentals if you did not receive the income in the course of a trade or business as a real estate dealer.
Report this
income on
Schedule E.
-
Income from farm rentals (including rentals paid in crop shares) if, as landlord, you did not materially participate in the
production or
management of the production of farm products on the land. See
Pub. 225 for details.
-
Dividends on shares of stock and interest on bonds, notes, etc., if you did not receive the income in the course of your trade
or business
as a dealer in stocks or securities.
-
Gain or loss from:
-
The sale or exchange of a capital asset;
-
The sale, exchange, involuntary conversion, or other disposition of property unless the property is stock in trade or other
property that
would be includible in inventory, or held primarily for sale to customers in the ordinary course of the business; or
-
Certain transactions in timber, coal, or domestic iron ore.
-
Net operating losses from other years.
-
Termination payments you received as a former insurance salesperson if all of the following conditions are met.
-
The payment was received from an insurance company because of services you performed as an insurance salesperson for the
company.
-
The payment was received after termination of your agreement to perform services for the company.
-
You did not perform any services for the company after termination and before the end of the year in which you received the
payment.
-
You entered into a covenant not to compete against the company for at least a
1-year period beginning on the date of termination.
-
The amount of the payment depended primarily on policies sold by or credited to your account during the last year of the agreement,
or the
extent to which those policies remain in force for some period after termination, or both.
-
The amount of the payment did not depend to any extent on length of service or overall earnings from services performed for
the company
(regardless of whether eligibility for the payment depended on length of service).
Statutory Employee Income
If you were required to check the box on
Schedule C or C-EZ, line 1, because you were a statutory employee, do not include the net profit or (loss) from that
Schedule C, line 31 (or the net profit from
Schedule C-EZ, line 3), on
Short or Long Schedule SE, line 2. But if you file
Long Schedule SE, be sure to include statutory employee social security wages and tips from
Form W-2 on
line 8a.
How Can the Optional Methods Help You?
Social security coverage.
The optional methods may give you credit toward your social security coverage even though you have a loss or a small
amount of income from
self-employment.
Earned income credit (EIC).
Using the optional methods may qualify you to claim the EIC or give you a larger credit if your net earnings from
self-employment (determined
without using the optional methods) are
less than $1,600. Figure the EIC with and without using the optional methods to see if the optional methods will benefit you.
Additional child tax credit.
Using the optional methods may qualify you to claim the additional child tax credit or give you a larger credit if
your net earnings from
self-employment (determined without using the optional methods) are
less than $1,600. Figure the additional child tax credit with and without using the optional methods to see if the optional
methods will benefit
you.
Child and dependent care credit.
The optional methods may help you qualify for this credit or give you a larger credit if your net earnings from self-employment
(determined without
using the optional methods) are
less than $1,600. Figure this credit with and without using the optional methods to see if the optional methods will benefit
you.
Self-employed health insurance deduction.
The optional methods of computing net earnings from self-employment may be used to figure your self-employed health
insurance deduction.
Using the optional methods may give you the benefits described
above, but they may also increase your SE tax.
You may use this method to figure your net earnings from farm self-employment if your gross farm income was
$2,400 or less or your net farm profits were
less than $1,733. Net farm profits are the total of the amounts from:
-
Schedule F (Form 1040), line 36, and
-
Schedule K-1 (Form 1065), box 14, code A (from farm partnerships).
There is no limit on how many years you can use this method.
Under this method, you report on
Part II, line 15,
two-thirds of your gross farm income, up to
$1,600, as your net earnings. This method can increase or decrease your net earnings from farm self-employment even if the
farming business had a
loss.
You can change the method after you file your return. That is, you can change from the regular to the optional method or from
the optional to the
regular method. To do this, file
Form 1040X.
For a farm partnership, figure your share of gross income based on the partnership agreement. With guaranteed payments, your
share of the
partnership's gross income is your guaranteed payments plus your share of the gross income after it is reduced by all guaranteed
payments made by the
partnership. If you were a limited partner, include only guaranteed payments for services you actually rendered to or on behalf
of the partnership.
You may be able to use this method to figure your net earnings from nonfarm self-employment if your net nonfarm profits were
less than $1,733 and also
less than 72.189% of your gross nonfarm income. Net nonfarm profits are the total of the amounts from:
-
Schedule C (Form 1040), line 31,
-
Schedule C-EZ (Form 1040), line 3,
-
Schedule K-1 (Form 1065), box 14, code A (from other than farm partnerships), and
-
Schedule K-1 (Form 1065-B),
box 9, code J1.
To use this method, you also must be regularly self-employed. You meet this requirement if your actual net earnings from
self-employment were
$400 or more in
2 of the 3 years preceding the year you use the nonfarm optional method. The net earnings of
$400 or more could be from either farm or nonfarm earnings or both. The net earnings include your distributive share of partnership
income or
loss subject to SE tax. Use of the nonfarm optional method from nonfarm self-employment is limited to
5 years. The
5 years do not have to be consecutive.
Under this method, you report on
Part II, line 17,
two-thirds of your gross nonfarm income, up to
$1,600, as your net earnings. But you cannot report less than your actual net earnings from nonfarm self-employment.
You can change the method after you file your return. That is, you can change from the regular to the optional method or from
the optional to the
regular method. To do so, file
Form 1040X.
Figure your share of gross income from a nonfarm partnership in the same manner as a farm partnership. See
Farm Optional Method on
this page for details.
Using Both Optional Methods
If you can use both methods, you can report less than your total actual net earnings from farm and nonfarm self-employment,
but you cannot report
less than your actual net earnings from nonfarm self-employment alone.
If you use both methods to figure net earnings, you cannot report
more than $1,600 of net earnings from self-employment.
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