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Free 1040 ez 12. Free 1040 ez   Self-Employment Tax Table of Contents What's New for 2013 What's New for 2014 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Why Pay Self-Employment Tax? How To Pay Self-Employment TaxReplacing a lost social security card. Free 1040 ez Name change. Free 1040 ez Penalty for underpayment of estimated tax. Free 1040 ez Who Must Pay Self-Employment Tax?Limited partner. Free 1040 ez Community property. Free 1040 ez Figuring Self-Employment EarningsLandlord Participation in Farming Methods for Figuring Net EarningsRegular Method Farm Optional Method Nonfarm Optional Method Using Both Optional Methods Reporting Self-Employment Tax What's New for 2013 Tax rates. Free 1040 ez  For tax years beginning in 2013, the social security part of the self-employment tax increases from 10. Free 1040 ez 4% to 12. Free 1040 ez 4%. Free 1040 ez The Medicare part of the tax remains at 2. Free 1040 ez 9%. Free 1040 ez As a result, the self-employment tax is increased from 13. Free 1040 ez 3% to 15. Free 1040 ez 3%. Free 1040 ez Additional Medicare Tax. Free 1040 ez . Free 1040 ez  For tax years beginning in 2013, a 0. Free 1040 ez 9% Additional Medicare Tax applies to your Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above a threshold amount. Free 1040 ez Use Form 8959, Additional Medicare Tax, to figure this tax. Free 1040 ez For more information, see the Instructions for Form 8959. Free 1040 ez Maximum net earnings. Free 1040 ez  The maximum net self-employment earnings subject to the social security part (12. Free 1040 ez 4%) of the self-employment tax increased to $113,700 for 2013. Free 1040 ez There is no maximum limit on earnings subject to the Medicare part (2. Free 1040 ez 9%). Free 1040 ez What's New for 2014 Maximum net earnings. Free 1040 ez  The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2014 will be discussed in the 2013 Publication 334. Free 1040 ez Introduction Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Free 1040 ez It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. Free 1040 ez You usually have to pay SE tax if you are self-employed. Free 1040 ez You are usually self-employed if you operate your own farm on land you either own or rent. Free 1040 ez You have to figure SE tax on Schedule SE (Form 1040). Free 1040 ez Farmers who have employees may have to pay the employer's share of social security and Medicare taxes, as well. Free 1040 ez See chapter 13 for information on employment taxes. Free 1040 ez Self-employment tax rate. Free 1040 ez   For tax years beginning in 2013, the self-employment tax rate is 15. Free 1040 ez 3%. Free 1040 ez The rate consists of two parts: 12. Free 1040 ez 4% for social security (old-age, survivors, and disability insurance) and 2. Free 1040 ez 9% for Medicare (hospital insurance). Free 1040 ez Topics - This chapter discusses: Why pay self-employment tax How to pay self-employment tax Who must pay self-employment tax Figuring self-employment earnings Landlord participation in farming Methods for figuring net earnings Reporting self-employment tax Useful Items - You may want to see: Publication 541 Partnerships Form (and Instructions) 1040 U. Free 1040 ez S. Free 1040 ez Individual Income Tax Return Sch F (Form 1040) Profit or Loss From Farming Sch SE (Form 1040) Self-Employment Tax 1065 U. Free 1040 ez S. Free 1040 ez Return of Partnership Income Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Free 1040 ez See chapter 16 for information about getting publications and forms. Free 1040 ez Why Pay Self-Employment Tax? Social security benefits are available to self-employed persons just as they are to wage earners. Free 1040 ez Your payments of SE tax contribute to your coverage under the social security system. Free 1040 ez Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Free 1040 ez How to become insured under social security. Free 1040 ez   You must be insured under the social security system before you begin receiving social security benefits. Free 1040 ez You are insured if you have the required number of credits (also called quarters of coverage). Free 1040 ez Earning credits in 2013. Free 1040 ez   You can earn a maximum of four credits per year. Free 1040 ez For 2013, you earn one credit for each $1,160 of combined wages and self-employment earnings subject to social security tax. Free 1040 ez You need $4,640 ($1,160 × 4) of combined wages and self-employment earnings subject to social security tax to earn four credits in 2013. Free 1040 ez It does not matter whether the income is earned in 1 quarter or is spread over 2 or more quarters. Free 1040 ez For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, consult your nearest Social Security Administration (SSA) office or visit the SSA website at www. Free 1040 ez socialsecurity. Free 1040 ez gov. Free 1040 ez Making false statements to get or to increase social security benefits may subject you to penalties. Free 1040 ez The Social Security Administration (SSA) time limit for posting self-employment earnings. Free 1040 ez   Generally, the SSA will give you credit only for self-employment earnings reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. Free 1040 ez    If you file your tax return or report a change in your self-employment earnings after the SSA time limit for posting self-employment earnings, the SSA may change its records, but only to remove or reduce the amount. Free 1040 ez The SSA will not change its records to increase your self-employment earnings after the SSA time limit listed above. Free 1040 ez How To Pay Self-Employment Tax To pay SE tax, you must have a social security number (SSN) or an individual taxpayer identification number (ITIN). Free 1040 ez This section explains how to: Obtain an SSN or ITIN, and Pay your SE tax using estimated tax. Free 1040 ez An ITIN does not entitle you to social security benefits. Free 1040 ez Obtaining an ITIN does not change your immigration or employment status under U. Free 1040 ez S. Free 1040 ez law. Free 1040 ez Obtaining a social security number. Free 1040 ez   If you have never had an SSN, apply for one using Form SS-5, Application for a Social Security Card. Free 1040 ez The application is also available in Spanish. Free 1040 ez You can get this form at any Social Security office or by calling 1-800-772-1213. Free 1040 ez    You can also download Form SS-5 from the Social Security Administration website at  www. Free 1040 ez socialsecurity. Free 1040 ez gov. Free 1040 ez   If you have a social security number from the time you were an employee, you must use that number. Free 1040 ez Do not apply for a new one. Free 1040 ez Replacing a lost social security card. Free 1040 ez   If you have a number but lost your card, file Form SS-5. Free 1040 ez You will get a new card showing your original number, not a new number. Free 1040 ez Name change. Free 1040 ez   If your name has changed since you received your social security card, complete Form SS-5 to report a name change. Free 1040 ez Obtaining an individual taxpayer identification number. Free 1040 ez   The IRS will issue you an ITIN, for tax use only, if you are a nonresident or resident alien and you do not have, and are not eligible to get, an SSN. Free 1040 ez To apply for an ITIN, file Form W-7, Application for IRS Individual Taxpayer Identification Number. Free 1040 ez You can get this form by calling 1-800-829-3676. Free 1040 ez For more information on ITINs, see Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number. Free 1040 ez Form W-7 and Publication 1915 are also available in Spanish. Free 1040 ez    You can also download Form W-7 from the IRS website at IRS. Free 1040 ez gov. Free 1040 ez Paying estimated tax. Free 1040 ez   Estimated tax is the method used to pay tax (including SE tax) on income not subject to withholding. Free 1040 ez 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. Free 1040 ez Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay the tax. Free 1040 ez   However, if at least two-thirds of your gross income for 2013 or 2014 was from farming and you file your 2014 Form 1040 and pay all the tax due by March 2, 2015, you do not have to pay any estimated tax. Free 1040 ez For more information about estimated tax for farmers, see chapter 15. Free 1040 ez Penalty for underpayment of estimated tax. Free 1040 ez   You may have to pay a penalty if you do not pay enough estimated tax by its due date. Free 1040 ez Who Must Pay Self-Employment Tax? You must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Free 1040 ez The SE tax rules apply no matter how old you are and even if you are already receiving social security or Medicare benefits. Free 1040 ez Aliens. Free 1040 ez   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. Free 1040 ez S. Free 1040 ez citizens. Free 1040 ez Nonresident aliens are not subject to self-employment tax. Free 1040 ez However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. Free 1040 ez S. Free 1040 ez residents for self-employment tax purposes. Free 1040 ez For more information on aliens, see Publication 519, U. Free 1040 ez S. Free 1040 ez Tax Guide for Aliens. Free 1040 ez 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. Free 1040 ez A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. Free 1040 ez Share farmer. Free 1040 ez   You are a self-employed farmer under an income-sharing arrangement if both the following apply. Free 1040 ez You produce a crop or raise livestock on land belonging to another person. Free 1040 ez Your share of the crop or livestock, or the proceeds from their sale, depends on the amount produced. Free 1040 ez Your net farm profit or loss from the income-sharing arrangement is reported on Schedule F (Form 1040) and included in your self-employment earnings. Free 1040 ez   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. Free 1040 ez This will depend on whether the landowner has the right to direct or control your performance of services. Free 1040 ez Example. Free 1040 ez A share farmer produces a crop on land owned by another person on a 50-50 crop-share basis. Free 1040 ez Under the terms of their agreement, the share farmer furnishes the labor and half the cost of seed and fertilizer. Free 1040 ez The landowner furnishes the machinery and equipment used to produce and harvest the crop, and half the cost of seed and fertilizer. Free 1040 ez The share farmer is provided a house in which to live. Free 1040 ez The landowner and the share farmer decide on a cropping plan. Free 1040 ez The share farmer is a self-employed farmer for purposes of the agreement to produce the crops, and the share farmer's part of the profit or loss from the crops is reported on Schedule F (Form 1040) and included in self-employment earnings. Free 1040 ez The tax treatment of the landowner is discussed later under Landlord Participation in Farming. Free 1040 ez Contract farming. Free 1040 ez   Under typical contract farming arrangements, the grower receives a fixed payment per unit of crops or finished livestock delivered to the processor or packing company. Free 1040 ez Since the grower typically furnishes labor and bears some production risk, the payments are reported on Schedule F and are therefore subject to self-employment tax. Free 1040 ez 4-H Club or FFA project. Free 1040 ez   If an individual participates in a 4-H Club or Future Farmers of America (FFA) project, any net income received from sales or prizes related to the project may be subject to income tax. Free 1040 ez Report the net income as “Other income” on line 21 of Form 1040. Free 1040 ez If necessary, attach a statement showing the gross income and expenses. Free 1040 ez 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. Free 1040 ez Such a project is generally not considered a trade or business. Free 1040 ez Partners in a partnership. Free 1040 ez   Generally, you are self-employed if you are a member of a partnership that carries on a trade or business. Free 1040 ez Limited partner. Free 1040 ez   If you are a limited partner, your partnership income is generally not subject to SE tax. Free 1040 ez 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 (Form 1065). Free 1040 ez Business Owned and Operated by Spouses. Free 1040 ez   If you and your spouse jointly own and operate a farm as an unincorporated business and share in the profits and losses, you are partners in a partnership whether or not you have a formal partnership agreement. Free 1040 ez You must file Form 1065, instead of Schedule F, unless you make a joint election to be treated as a qualified joint venture. Free 1040 ez Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. Free 1040 ez Qualified joint venture. Free 1040 ez   If you and your spouse each materially participate as the only members of a jointly owned and operated farm, and you file a joint tax return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Free 1040 ez For an explanation of “material participation,” see the instructions for Schedule C, line G, and the instructions for Schedule F, line E. Free 1040 ez   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Free 1040 ez Each of you must file a separate Schedule F and a separate Schedule SE. Free 1040 ez For more information, see Qualified Joint Venture in the Instructions for Schedule SE (Form 1040). Free 1040 ez Spouse employee. Free 1040 ez   If your spouse is your employee, not your partner, you must withhold and pay social security and Medicare taxes for him or her. Free 1040 ez For more information about employment taxes, see chapter 13. Free 1040 ez Community property. Free 1040 ez   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 property, treat your share as your self-employment earnings. Free 1040 ez Do not treat any of your share as self-employment earnings of your spouse. Free 1040 ez Figuring Self-Employment Earnings Farmer. Free 1040 ez   If you are self-employed as a farmer, use Schedule F (Form 1040) to figure your self-employment earnings. Free 1040 ez Partnership income or loss. Free 1040 ez   If you are a member of a partnership that carries on a trade or business, the partnership should report your self-employment earnings in box 14, code A, of your Schedule K-1 (Form 1065). Free 1040 ez Box 14 of Schedule K-1 may also provide amounts for gross farming or fishing income (code B) and gross nonfarm income (code C). Free 1040 ez 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). Free 1040 ez   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. Free 1040 ez   If the amount reported is a loss, include only the deductible amount when you figure your total self-employment earnings. Free 1040 ez   For more information, see the Partner's Instructions for Schedule K-1 (Form 1065). Free 1040 ez   For general information on partnerships, see Publication 541. Free 1040 ez More than one business. Free 1040 ez   If you have self-employment earnings from more than one trade, business, or profession, you generally must combine the net profit or loss from each to determine your total self-employment earnings. Free 1040 ez A loss from one business reduces your profit from another business. Free 1040 ez However, do not combine earnings from farm and nonfarm businesses if you are using one of the optional methods (discussed later) to figure net earnings. Free 1040 ez Community property. Free 1040 ez   If any of the income from a farm or business, other than a partnership, is community property under state law, it is included in the self-employment earnings of the spouse carrying on the trade or business. Free 1040 ez Lost income payments. Free 1040 ez   Lost income payments received from insurance or other sources for reducing or stopping farming activities are included in self-employment earnings. Free 1040 ez These include USDA payments to compensate for lost income resulting from reductions in tobacco quotas and allotments. Free 1040 ez Even if you are not farming when you receive the payment, it is included in self-employment earnings if it relates to your farm business (even though it is temporarily inactive). Free 1040 ez A connection exists if it is clear the payment would not have been made but for your conduct of your farm business. Free 1040 ez Gain or loss. Free 1040 ez   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 self-employment earnings. Free 1040 ez It does not matter whether the disposition is a sale, exchange, or involuntary conversion. Free 1040 ez For example, gains or losses from the disposition of the following types of property are not included in self-employment earnings. Free 1040 ez Investment property. Free 1040 ez Depreciable property or other fixed assets used in your trade or business. Free 1040 ez Livestock held for draft, breeding, sport, or dairy purposes, and not held primarily for sale, regardless of how long the livestock was held, or whether it was raised or purchased. Free 1040 ez Unharvested standing crops sold with land held more than 1 year. Free 1040 ez Timber, coal, or iron ore held for more than 1 year if an economic interest was retained, such as a right to receive coal royalties. Free 1040 ez   A gain or loss from the cutting of timber is not included in self-employment earnings if the cutting is treated as a sale or exchange. Free 1040 ez For more information on electing to treat the cutting of timber as a sale or exchange, see Timber in chapter 8. Free 1040 ez Wages and salaries. Free 1040 ez   Wages and salaries received for services performed as an employee and covered by social security or railroad retirement are not included in self-employment earnings. Free 1040 ez   Wages paid in kind to you for agricultural labor, such as commodity wages, are not included in self-employment earnings. Free 1040 ez Retired partner. Free 1040 ez   Retirement income received by a partner from his or her partnership under a written plan is not included in self-employment earnings if all the following apply. Free 1040 ez The retired partner performs no services for the partnership during the year. Free 1040 ez The retired partner is owed only the retirement payments. Free 1040 ez The retired partner's share (if any) of the partnership capital was fully paid to the retired partner. Free 1040 ez The payments to the retired partner are lifelong periodic payments. Free 1040 ez Conservation Reserve Program (CRP) payments. Free 1040 ez   Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a longterm contract with the USDA, agreeing to convert to a less intensive use of that cropland. Free 1040 ez You must include the annual rental payments and any onetime incentive payment you receive under the program on Schedule F, lines 4a and 4b. Free 1040 ez Cost share payments you receive may qualify for the costsharing exclusion. Free 1040 ez See Cost-Sharing Exclusion (Improvements), above. Free 1040 ez CRP payments are reported to you on Form 1099G. Free 1040 ez Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. Free 1040 ez See the instructions for Schedule SE (Form 1040). Free 1040 ez Self-employed health insurance deduction. Free 1040 ez   You cannot deduct the self-employed health insurance deduction you report on Form 1040, line 29, from self-employment earnings on Schedule SE (Form 1040). Free 1040 ez Landlord Participation in Farming As a general rule, income and deductions from rentals and from personal property leased with real estate are not included in determining self-employment earnings. Free 1040 ez 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 landowner will, and does, materially participate in the production or management of production of the farm products on the land. Free 1040 ez Crop shares. Free 1040 ez   Rent paid in the form of crop shares is included in self-employment earnings for the year you sell, exchange, give away, or use the crop shares if you meet one of the four material participation tests (discussed next) at the time the crop shares are produced. Free 1040 ez Feeding such crop shares to livestock is considered using them. Free 1040 ez Your gross income for figuring your self-employment earnings includes the fair market value of the crop shares when they are used as feed. Free 1040 ez Material participation for landlords. Free 1040 ez   You materially participate if you have an arrangement with your tenant for your participation and you meet one or more of the following tests. Free 1040 ez You do at least three of the following. Free 1040 ez Pay, using cash or credit, at least half the direct costs of producing the crop or livestock. Free 1040 ez Furnish at least half the tools, equipment, and livestock used in the production activities. Free 1040 ez Advise or consult with your tenant. Free 1040 ez Inspect the production activities periodically. Free 1040 ez You regularly and frequently make, or take an important part in making, management decisions substantially contributing to or affecting the success of the enterprise. Free 1040 ez You work 100 hours or more spread over a period of 5 weeks or more in activities connected with agricultural production. Free 1040 ez You do things that, considered in their totality, show you are materially and significantly involved in the production of the farm commodities. Free 1040 ez These tests may be used as general guides for determining whether you are a material participant. Free 1040 ez Example. Free 1040 ez Drew Houston agrees to produce a crop on J. Free 1040 ez Clarke's cotton farm, with each receiving half the proceeds. Free 1040 ez Clarke advises Houston when to plant, spray, and pick the cotton. Free 1040 ez During the growing season, Clarke inspects the crop every few days to determine whether Houston is properly taking care of the crop. Free 1040 ez Houston furnishes all labor needed to grow and harvest the crop. Free 1040 ez The management decisions made by Clarke in connection with the care of the cotton crop and his regular inspection of the crop establish that he participates to a material degree in the cotton production operations. Free 1040 ez The income Clarke receives from his cotton farm is included in his self-employment earnings. Free 1040 ez Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. Free 1040 ez The regular method. Free 1040 ez The farm optional method. Free 1040 ez The nonfarm optional method. Free 1040 ez You must use the regular method unless you are eligible to use one or both of the optional methods. Free 1040 ez See Figure 12-1 , shown later. Free 1040 ez Figure 12-1. Free 1040 ez Can I Use the Optional Methods? Please click here for the text description of the image. Free 1040 ez Figure 12–1. Free 1040 ez Can I Use the Optional Methods? 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. Free 1040 ez You want to receive credit for social security benefit coverage. Free 1040 ez You incurred child or dependent care expenses for which you could claim a credit. Free 1040 ez (An optional method may increase your earned income, which could increase your credit. Free 1040 ez ) You are entitled to the earned income credit. Free 1040 ez (An optional method may increase your earned income, which could increase your credit. Free 1040 ez ) You are entitled to the additional child tax credit. Free 1040 ez (An optional method may increase your earned income, which could increase your credit. Free 1040 ez ) Effects of using an optional method. Free 1040 ez   Using an optional method could increase your SE tax. Free 1040 ez Paying more SE tax may result in you getting higher social security disability or retirement benefits. Free 1040 ez   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. Free 1040 ez   The optional methods may be used only to figure your SE tax. Free 1040 ez To figure your income tax, include your actual self-employment earnings in gross income, regardless of which method you use to determine SE tax. Free 1040 ez Regular Method Multiply your total self-employment earnings by 92. Free 1040 ez 35% (. Free 1040 ez 9235) to get your net earnings under the regular method. Free 1040 ez See Short Schedule SE, line 4, or Long Schedule SE, line 4a. Free 1040 ez Net earnings figured using the regular method are also called “actual net earnings. Free 1040 ez ” Farm Optional Method Use the farm optional method only for self-employment earnings from a farming business. Free 1040 ez You can use this method if you meet either of the following tests. Free 1040 ez Your gross farm income is $6,960 or less. Free 1040 ez Your net farm profits are less than $5,024. Free 1040 ez Gross farm income. Free 1040 ez   Your gross farm income is the total of the amounts from: Schedule F (Form 1040), line 9, and Schedule K-1 (Form 1065), box 14, code B (from farm partnerships). Free 1040 ez Net farm profits. Free 1040 ez   Net farm profits generally are the total of the amounts from: Schedule F (Form 1040), line 34, and Schedule K-1 (Form 1065), box 14, code A (from farm partnerships). Free 1040 ez However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. Free 1040 ez For more information, see Partnership income or loss , earlier. Free 1040 ez Figuring farm net earnings. Free 1040 ez   If you meet either of the two tests explained above, use Table 12-1. Free 1040 ez Figuring Farm Net Earnings , to figure your net earnings from self-employment under the farm optional method. Free 1040 ez Table 12-1. Free 1040 ez Figuring Farm Net Earnings IF your gross farm income  is. Free 1040 ez . Free 1040 ez . Free 1040 ez THEN your net earnings are equal to. Free 1040 ez . Free 1040 ez . Free 1040 ez $6,960 or less Two-thirds of your gross farm income. Free 1040 ez More than $6,960 $4,640 Optional method can reduce or eliminate SE tax. Free 1040 ez   If your gross farm income is $6,960 or less and your farm net earnings figured under the farm optional method are less than your actual net earnings, you can use the farm optional method to reduce or eliminate your SE tax. Free 1040 ez Your actual net earnings are your net earnings figured using the regular method, explained earlier. Free 1040 ez Example. Free 1040 ez Your gross farm income is $540 and your net farm profit is $460. Free 1040 ez Consequently, your net earnings figured under the farm optional method are $360 (2/3 of $540) and your actual net earnings are $425 (92. Free 1040 ez 35% of $460). Free 1040 ez You owe no SE tax if you use the optional method because your net earnings under the farm optional method are less than $400. Free 1040 ez Nonfarm Optional Method This is an optional method available for determining net earnings from nonfarm self-employment, much like the farm optional method. Free 1040 ez If you are also engaged in a nonfarm business, you may be able to use this method to figure your nonfarm net earnings. Free 1040 ez You can use this method even if you do not use the farm optional method for determining your farm net earnings and even if you have a net loss from your nonfarm business. Free 1040 ez For more information about the nonfarm optional method, see Publication 334. Free 1040 ez You cannot combine farm and nonfarm self-employment earnings to figure your net earnings under either of the optional methods. Free 1040 ez Using Both 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. Free 1040 ez You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. Free 1040 ez If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. Free 1040 ez Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. Free 1040 ez Then, enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. Free 1040 ez Most taxpayers can use Section A–Short Schedule SE to figure their SE tax. Free 1040 ez However, certain taxpayers must use Section B–Long Schedule SE. Free 1040 ez Use the chart on page 1 of Schedule SE to find out which one to use. Free 1040 ez If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return. Free 1040 ez Deduction for employer-equivalent portion of self-employment tax. Free 1040 ez   You can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Free 1040 ez This deduction only affects your income tax. Free 1040 ez It does not affect either your net earnings from self-employment or your SE tax. Free 1040 ez   To deduct the tax, enter on Form 1040, line 27, the amount shown on Section A, Line 6, or Section B, line 13, Deduction for employer-equivalent portion of self-employment tax, of the Schedule SE. Free 1040 ez Joint return. Free 1040 ez   Even if you file a joint return, you cannot file a joint Schedule SE. Free 1040 ez This is true whether one spouse or both spouses have self-employment earnings. Free 1040 ez Your spouse is not considered self-employed just because you are. Free 1040 ez If both of you have self-employment earnings, each of you must complete a separate Schedule SE. Free 1040 ez 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. Free 1040 ez Attach both schedules to the joint return. Free 1040 ez If you and your spouse operate a business as a partnership, see Business Owned and Operated by Spouses and Qualified joint venture , earlier, under Who Must Pay Self-Employment Tax . Free 1040 ez Prev  Up  Next   Home   More Online Publications
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Understanding your CP11M Notice

We made changes to your return involving the Making Work Pay and Government Retiree Credit. You owe money on your taxes as a result of these changes.

Tax publications you may find useful

How to get help

Calling the toll free number listed on the top right corner of your notice is the fastest way to get your questions answered.

You can also authorize someone (such as an accountant) to contact the IRS on your behalf using this Power of Attorney and Declaration of Representative (Form 2848).

Or you may qualify for help from a Low Income Taxpayer Clinic.
 


What you need to do

  • Read your notice carefully ― it will explain how the changes we made affected the Making Work Pay and Government Retiree Credit.
  • Pay the amount owed by the date on the notice's payment coupon.
  • Make payment arrangements if you can't pay the full amount you owe.
  • Contact us within 60 days of the date of your notice if you disagree with the change we made.
  • Correct the copy of your tax return that you kept for your records.

You may want to...


Answers to Common Questions

How can I find out what caused my tax return to change?
Please contact us at the number listed on your notice for specific information concerning your tax return.

What should I do if I disagree with the changes you made?
If you disagree, contact us at the toll free number listed on the top right corner of your notice.

If you contact us in writing within 60 days of the date of this notice, we'll reverse the change we made to your account. However, if you're unable to provide us additional information that justifies the reversal and we believe the reversal is in error, we'll forward your case for audit. This step gives you formal appeal rights, including the right to appeal our decision in court before you have to pay the additional tax. After we forward your case, the audit staff will contact you within five to six weeks to fully explain the audit process and your rights. If you don't contact us within the 60-day period, you'll lose your right to appeal our decision before payment of tax.

If you don't contact us within 60 days, the change won't be reversed and you must pay the additional tax. You may then file a claim for refund. You must submit the claim within three years of the date you filed the tax return, or within two years of the date of your last payment for this tax.

What happens if I can’t pay the full amount I owe?
You can arrange to make a payment plan with us if you can’t pay the full amount you owe.

Am I charged interest on the money I owe?
Not if you pay the full amount you owe by the date on the payment coupon. However interest accrues on the unpaid balance after that date.

Will I receive a penalty if I can't pay the full amount?
Yes, you will receive a late payment penalty. You can contact us at the number given on your notice if you're unable to pay the full amount shown in your specific notice because of circumstances beyond your control. Contact us by the due date of your payment and, depending on your situation, we may be able to remove the penalty.

What is the Making Work Pay Credit?
Making Work Pay Credit is a refundable tax credit that can go up to $400 for individuals and to $800 for married taxpayers.

How can taxpayers get this credit?
Taxpayers received the credit in advance through the automatic recalculation of their withholding amounts in the spring of 2009. This recalculation resulted in more take-home pay for them in their paychecks. Taxpayers then must demonstrate their eligibility for the credit by completing a Schedule M, Making Work Pay and Government Retiree Credits on their 2009 income tax return.

What happens if I don’t receive a paycheck from an employer?
You can claim the credit on your 2009 income tax return with a Schedule M, Making Work Pay and Government Retiree Credits.


Tips for next year

Consider filing your taxes electronically. Filing online can help you avoid mistakes and find credits and deductions that you may qualify for. In many cases you can file for free. Learn more about e-file.

Perform a quick check on the amount you have withheld to pay your taxes to make sure you won't owe money next year. You can use this IRS withholding calculator.

 

Page Last Reviewed or Updated: 28-Mar-2014

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