45.1 What Is Self-Employment Income?
On Schedule SE, you generally figure self-employment tax on the net profit from your business or profession whether you participate in its activities full or part time. Net profit is generally the amount shown on Line 31 of Schedule C (or Line 3 of Schedule C-EZ) if you are a sole proprietor. If you are a partner, net earnings subject to self-employment tax are taken from Box 14, Schedule K-1, of Form 1065. If you are a farmer, net farm profit is shown on Line 36, Schedule F.
If you have more than one self-employed operation, your net profit from all the operations is combined. A loss in one self-employed business will reduce the income from another business. You file separate Schedules C for each operation and one Schedule SE showing the combined income (less losses, if any).
For self-employment tax purposes, net earnings are not reduced by deductible contributions to your own SEP or Keogh plan (41.4)..
Married couples.
Where you and your spouse each have self-employment income, each spouse must figure separate self-employment income on a separate schedule. Each pays the tax on the separate self-employment income. Both schedules are attached to the joint return.
If you live in a community property state, business income is not treated as community property for self-employment tax purposes. The spouse who is actually carrying on the business is subject to self-employment tax on the earnings.
Caution
Qualified joint venture election by husband and wife.
If you and your spouse are the only members of a business that you jointly own and operate, you each materially participate in the business, and you file a joint return, you can make a joint election to file as sole proprietors on Schedule C (“qualified joint venture election”) instead of as a partnership. You make the joint venture election by filing separate Schedule Cs or C-EZs on which you each report your respective share (according to respective ownership interests) of the business income, gains, losses, deductions, and credits. If you make the election, each of you must file a separate Schedule SE to figure self-employment tax on your share of the joint venture income.
However, the reporting rule is different if you are making the election for a rental real estate business. In that case, use Schedule E instead of Schedule C. On one Schedule E, you each report your respective interests in the qualified joint venture and divide the income, gains, losses, deductions, and credits between you; check the “QJV” box on Schedule E and see the instructions. Since rental real estate income is generally not subject to self-employment tax (see exception 1 below), you do not have to file Schedule SE unless you have other income that is subject to self-employment tax.
Exceptions to self-employment tax.
Filing Tip
The following types of income or payments are not included as self-employment income on Schedule SE:
- Rooms in a hotel or in a boarding house.
- Apartments, but only if extra services for the occupants’ convenience, such as maid service or changing linens, are provided.
- Cabins or cabanas in tourist camps where you provide maid services, linens, utensils, and swimming, boating, fishing, and other facilities, for which you do not charge separately.
- Farmland in which the landlord materially participates in the actual production of the farm or in the management of production. For purposes of “material participation,” the activities of a landlord’s agent are not counted, only the landlord’s actual participation.
Net operating loss deduction.
A loss carryover from past years does not reduce business income for self-employment tax purposes. Similarly, the personal exemption may not be used to reduce self-employment income.
Statutory employees.
Wages of a statutory employee, such as a full-time life insurance salesperson (40.6), are not subject to self-employment tax, as Social Security and Medicare tax have been withheld.
Filing Tip
Farmers.
Cash or a payment in kind under the “Payment-in-Kind” program is considered earned income subject to self-employment tax.
Business interruption proceeds.
The IRS and the Tax Court disagree over whether business interruption insurance proceeds must be reported as earnings subject to self-employment tax. The Tax Court held that insurance payments made to a grocer as compensation for lost earnings due to a fire were not subject to self-employment tax because the payment was not for actual services. The IRS refuses to follow the decision, holding that such payments represented income that would have been earned had business operations not been interrupted.