Net earnings from self-employment is the basis upon which self-employment tax is paid. It is a term found on Schedule SE, Self-Employment Tax where the tax is figured annually (see Line 4 of Section A and Line 6 of Section B).
Net Earnings From Self-Employment and Net Profit on Schedule C:
Keep in mind, the term net earnings from self-employment is NOT the sameamount as the net profit amount shown of Schedule C, Line 31 (or Schedule F for farming, or Schedule K-1 for partners).
Schedule C net profit is carried to Schedule SE where it is reduced by a fraction. It is this reduced amount that is called net earnings from self-employment.
The fraction is .9235 and is shown on Schedule SE, Line 4 of Section A or Line 4a of Section B (depending on which section you use).
EXAMPLE:
- If net profit on Schedule C is $20,000 then net earnings from self-employment is $18,470 ($20,000 x .9235).
Note that the .9235 adjustment is the equivalent of a 7.65% reduction to net earning reported on Schedule C (100% minus 92.35% = 7.65%).
Note: The whole point of the 7.65% adjustment to net earnings and thededuction allowed on Form 1040, Line 27, for one-half (50%) of the self-employment tax, is to place self-employed persons on the same level as employees subject to FICA taxes.
Computing Net Earnings From Self-Employment
Steps to computing net earnings from self-employment:
- Carry net profit from Schedule C to Schedule SE, Section B, line 2.
- If line 1 is zero, enter the amount shown on line 2 on line 3
- Line 1: If you have farm income (Schedule F) or income from a partnership (Schedule K-1), enter the total of these amounts on line 1. Then add lines 1 and 2 and enter the total on line 3.
- Multiply line 3 (Schedule C net profit) by .9235 (this percentage is preprinted on line 4a).
- The result in step 3 is your net earnings from self-employment.
EXAMPLE:
- You have a job and operate your own business.
- You received a $30,000 salary from the job. Social security and Medicare taxes were withheld by your employer.
- You operated a part-time consulting business as a sole proprietor for the entire year.
- You reported a net profit from your business of $75,800 on Schedule C
- Net earnings from self-employment reported on Schedule SE was $70,000.
- $75,800 x .9235
- Your salary from your job plus net earnings from self-employment total $100,000 ($30,000 plus $70,000).
- The maximum wage base for tax year 2007 for social security taxes is$97,500 ($102,000 for 2008).
- There is no such limit for Medicare tax purposes.
Result:
- Social security tax on your salary:
- Your employer withheld social security tax (6.2%) and Medicare taxes (1.45%) from your $30,000 salary.
- Self-Employment tax on net earnings from self-employment of $70,000:
- Social security portion of self-employment tax:
- Since you had social security tax withheld from your $30,000 salary, the amount of net earnings from self-employmentsubject to social security tax is $67,500 (the wage base limit of $97,500 minus your $30,000 salary).
- Medicare portion self-employment tax:
- Since there is no earnings limit for Medicare taxes, your net earnings from self-employment subject to Medicare tax is $70,000 (Schedule C net income of $75,800 x .9235).
- Your self-employment tax equals $10,400 and is a combination of:
- The social security portion, $8,370 (12.4 x $67,500) plus
- The Medicare portion, $2,030 (.029 x $70,000).
- Social security portion of self-employment tax:
Reminder: You deduct $5,200 on Form 1040, Line 27 (50% x $10,400).
When to Pay Self-Employment Tax
When you make your quarterly estimated tax payments, you include both your estimated federal income tax liability AND your estimated self-employment taxliability.
For tax year 2008, quarterly installments are due:
- April 15
- June 16
- September 15
- January 15, 2009.
Schedule SE if filed annually along with Schedule C and Form 1040.
More Than One Business
Only one Schedule SE is required to be filed, regardless of the number of unincorporated businesses from which you had net earnings from self-employment.
For example, if you had three businesses, two with net earnings of $20,000 and one with a net loss of $5,000, you would file:
- Three Schedule Cs, and
- One Schedule SE.
The net profit of $15,000 ($20,000 minus $5,000) would be entered on Schedule SE. The $15,000 would then be converted to net earnings from self-employment (.9235 x $15,000=$13,853).
Net Operating Loss Deduction
Do not use a loss carried over from a previous year to reduce business income for self-employment tax purposes.
