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

Tax credits, deductions and savings plans can help taxpayers with their expenses for higher education.

  • A tax credit reduces the amount of income tax you may have to pay.
  • A deduction reduces the amount of your income that is subject to tax, thus generally reducing the amount of tax you may have to pay.
  • Certain savings plans allow the accumulated interest to grow tax-free until money is taken out (known as a distribution), or allow the distribution to be tax-free, or both.
  • An exclusion from income means that you won't have to pay income tax on the benefit you're receiving, but you also won't be able to use that same tax-free benefit for a deduction or credit. 
  • Education credits are claimed on Form 8863, Education Credits. For details, see IRS Publication 970, Tax Benefits of Education.
 You can use the IRS’s Interactive Tax Assistant tool to help determine if you’re eligible for educational credits or deductions, including the American opportunity credit, the lifetime learning credit and the tuition and fees deduction.

Credits


American Opportunity Credit

Under the American Recovery and Reinvestment Act (ARRA), more parents and students qualify for a tax credit, the American opportunity credit, to pay for college expenses.

The American opportunity credit originally modified the existing Hope credit for tax years 2009 and 2010. The American opportunity credit was later extended through 2017, making the benefit available to a broader range of taxpayers, including many with higher incomes and those who owe no tax. It also adds required course materials to the list of qualifying expenses and allows the credit to be claimed for four post-secondary education years instead of two. Many of those eligible qualify for the maximum annual credit of $2,500 per student.

The full credit is available to individuals whose modified adjusted gross income is $80,000 or less, or $160,000 or less for married couples filing a joint return. The credit is phased out for taxpayers with incomes above these levels. These income limits are higher than under the the prior Hope and existing lifetime learning credit.

If you have questions about the American opportunity credit, these questions and answers might help. For more information, see American opportunity credit.

Lifetime Learning Credit

The lifetime learning credit helps parents and students pay for post-secondary education.

For the tax year, you may be able to claim a lifetime learning credit of up to $2,000 for qualified education expenses paid for all students enrolled in eligible educational institutions. There is no limit on the number of years the lifetime learning credit can be claimed for each student. However, a taxpayer cannot claim both the American opportunity credit and lifetime learning credits for the same student in one year. Thus, the lifetime learning credit may be particularly helpful to graduate students, students who are only taking one course and those who are not pursuing a degree.

Generally, you can claim the lifetime learning credit if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is either yourself, your spouse or a dependent for whom you claim an exemption on your tax return.

If you’re eligible to claim the lifetime learning credit and are also eligible to claim the American opportunity credit for the same student in the same year, you can choose to claim either credit, but not both.

If you pay qualified education expenses for more than one student in the same year, you can choose to take credits on a per-student, per-year basis. This means that, for example, you can claim the American opportunity credit for one student and the lifetime learning credit for another student in the same year.


Deductions


Tuition and Fees Deduction

You may be able to deduct qualified education expenses paid during the year for yourself, your spouse or your dependent. You cannot claim this deduction if your filing status is married filing separately or if another person can claim an exemption for you as a dependent on his or her tax return. The qualified expenses must be for higher education.

The tuition and fees deduction can reduce the amount of your income subject to tax by up to $4,000. This deduction, reported on Form 8917, Tuition and Fees Deduction, is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Schedule A (Form 1040). This deduction may be beneficial to you if, for example, you cannot take the lifetime learning credit because your income is too high.

You may be able to take one of the education credits for your education expenses instead of a tuition and fees deduction. You can choose the one that will give you the lower tax.

Generally, you can claim the tuition and fees deduction if all three of the following requirements are met:

  • You pay qualified education expenses of higher education.
  • You pay the education expenses for an eligible student.
  • The eligible student is yourself, your spouse, or your dependent for whom you claim an exemption on your tax return.

You cannot claim the tuition and fees deduction if any of the following apply:

  • Your filing status is married filing separately.

  • Another person can claim an exemption for you as a dependent on his or her tax return. You cannot take the deduction even if the other person does not actually claim that exemption.

  • Your modified adjusted gross income (MAGI) is more than $80,000 ($160,000 if filing a joint return).

  • You were a nonresident alien for any part of the year and did not elect to be treated as a resident alien for tax purposes. More information on nonresident aliens can be found in Publication 519, U.S. Tax Guide for Aliens.

  • You or anyone else claims an education credit for expenses of the student for whom the qualified education expenses were paid.

Student-activity fees and expenses for course-related books, supplies and equipment are included in qualified education expenses only if the fees and expenses must be paid to the institution as a condition of enrollment or attendance.

Student Loan Interest Deduction

Generally, personal interest you pay, other than certain mortgage interest, is not deductible on your tax return. However, if your modified adjusted gross income (MAGI) is less than $75,000 ($150,000 if filing a joint return), there is a special deduction allowed for paying interest on a student loan (also known as an education loan) used for higher education. Student loan interest is interest you paid during the year on a qualified student loan. It includes both required and voluntary interest payments.

For most taxpayers, MAGI is the adjusted gross income as figured on their federal income tax return before subtracting any deduction for student loan interest. This deduction can reduce the amount of your income subject to tax by up to $2,500.

The student loan interest deduction is taken as an adjustment to income. This means you can claim this deduction even if you do not itemize deductions on Form 1040's Schedule A.

Qualified Student Loan

This is a loan you took out solely to pay qualified education expenses (defined later) that were:

  • For you, your spouse, or a person who was your dependent when you took out the loan.
  • Paid or incurred within a reasonable period of time before or after you took out the loan.
  • For education provided during an academic period for an eligible student.

Loans from the following sources are not qualified student loans:

  • A related person.
  • A qualified employer plan.

Qualified Education Expenses

For purposes of the student loan interest deduction, these expenses are the total costs of attending an eligible educational institution, including graduate school. They include amounts paid for the following items:

  • Tuition and fees.
  • Room and board.
  • Books, supplies and equipment.
  • Other necessary expenses (such as transportation).

The cost of room and board qualifies only to the extent that it is not more than the greater of:

  • The allowance for room and board, as determined by the eligible educational institution, that was included in the cost of attendance (for federal financial aid purposes) for a particular academic period and living arrangement of the student, or
  • The actual amount charged if the student is residing in housing owned or operated by the eligible educational institution.

Business Deduction for Work-Related Education


If you are an employee and can itemize your deductions, you may be able to claim a deduction for the expenses you pay for your work-related education. Your deduction will be the amount by which your qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of your adjusted gross income. An itemized deduction may reduce the amount of your income subject to tax.

If you are self-employed, you deduct your expenses for qualifying work-related education directly from your self-employment income. This may reduce the amount of your income subject to both income tax and self-employment tax.

Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the lifetime learning credit. You may qualify for these other benefits even if you do not meet the requirements listed above.

To claim a business deduction for work-related education, you must:

  • Be working.
  • Itemize your deductions on Schedule A (Form 1040 or 1040NR) if you are an employee.
  • File Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040) if you are self-employed.
  • Have expenses for education that meet the requirements discussed under Qualifying Work-Related Education, below.

Qualifying Work-Related Education

You can deduct the costs of qualifying work-related education as business expenses. This is education that meets at least one of the following two tests:

  • The education is required by your employer or the law to keep your present salary, status or job. The required education must serve a bona fide business purpose of your employer.
  • The education maintains or improves skills needed in your present work.

However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:

  • Is needed to meet the minimum educational requirements of your present trade or business or
  • Is part of a program of study that will qualify you for a new trade or business.

You can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.

Education Required by Employer or by Law

Education you need to meet the minimum educational requirements for your present trade or business is not qualifying work-related education. Once you have met the minimum educational requirements for your job, your employer or the law may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met.

  • It is required for you to keep your present salary, status or job.
  • The requirement serves a business purpose of your employer.
  • The education is not part of a program that will qualify you for a new trade or business.

When you get more education than your employer or the law requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in your present work.

Education to Maintain or Improve Skills

If your education is not required by your employer or the law, it can be qualifying work-related education only if it maintains or improves skills needed in your present work. This could include refresher courses, courses on current developments and academic or vocational courses.


Savings Plans


529 Plans

States sponsor 529 plans — qualified tuition programs authorized under section 529 of the Internal Revenue Code — that allow taxpayers to either prepay or contribute to an account for paying a student's qualified higher education expenses. Similarly, colleges and groups of colleges sponsor 529 plans that allow them to prepay a student's qualified education expenses. These 529 plans have, in recent years, become a popular way for parents and other family members to save for a child’s college education. Though contributions to 529 plans are not deductible, there is also no income limit for contributors.

529 plan distributions are tax-free as long as they are used to pay qualified higher education expenses for a designated beneficiary. Qualified expenses include tuition, required fees, books and supplies. For someone who is at least a half-time student, room and board also qualify.

For 2009 and 2010, an ARRA change to tax-free college savings plans and prepaid tuition programs added to this list expenses for computer technology and equipment or Internet access and related services to be used by the student while enrolled at an eligible educational institution. Software designed for sports, games or hobbies does not qualify, unless it is predominantly educational in nature. In general, expenses for computer technology are not qualified expenses for the American opportunity credit, lifetime learning credit or tuition and fees deduction.

Coverdell Education Savings Account

This account was created as an incentive to help parents and students save for education expenses. Unlike a 529 plan, a Coverdell ESA can be used to pay a student’s eligible k-12 expenses, as well as post-secondary expenses. On the other hand, income limits apply to contributors, and  the total contributions for the beneficiary of this account cannot be more than $2,000 in any year, no matter how many accounts have been established. A beneficiary is someone who is under age 18 or is a special needs beneficiary.

Contributions to a Coverdell ESA are not deductible, but amounts deposited in the account grow tax free until distributed. The beneficiary will not owe tax on the distributions if they are less than a beneficiary’s qualified education expenses at an eligible institution. This benefit applies to qualified higher education expenses as well as to qualified elementary and secondary education expenses.

Here are some things to remember about distributions from Coverdell accounts:

  • Distributions are tax-free as long as they are used for qualified education expenses, such as tuition and fees, required books, supplies and equipment and qualified expenses for room and board.

  • There is no tax on distributions if they are for enrollment or attendance at an eligible educational institution. This includes any public, private or religious school that provides elementary or secondary education as determined under state law. Virtually all accredited public, nonprofit and proprietary (privately owned profit-making) post-secondary institutions are eligible.

  • Education tax credits can be claimed in the same year the beneficiary takes a tax-free distribution from a Coverdell ESA, as long as the same expenses are not used for both benefits.

  • If the distribution exceeds qualified education expenses, a portion will be taxable to the beneficiary and will usually be subject to an additional 10% tax. Exceptions to the additional 10% tax include the death or disability of the beneficiary or if the beneficiary receives a qualified scholarship.

For more information, see Tax Tip 2008-59, Coverdell Education Savings Accounts.


Scholarships and Fellowships


A scholarship is generally an amount paid or allowed to, or for the benefit of, a student at an educational institution to aid in the pursuit of studies. The student may be either an undergraduate or a graduate. A fellowship is generally an amount paid for the benefit of an individual to aid in the pursuit of study or research. Generally, whether the amount is tax free or taxable depends on the expense paid with the amount and whether you are a degree candidate.

A scholarship or fellowship is tax free only if you meet the following conditions:

  • You are a candidate for a degree at an eligible educational institution.
  • You use the scholarship or fellowship to pay qualified education expenses.

Qualified Education Expenses

For purposes of tax-free scholarships and fellowships, these are expenses for:

  • Tuition and fees required to enroll at or attend an eligible educational institution.
  • Course-related expenses, such as fees, books, supplies, and equipment that are required for the courses at the eligible educational institution. These items must be required of all students in your course of instruction.

However, in order for these to be qualified education expenses, the terms of the scholarship or fellowship cannot require that it be used for other purposes, such as room and board, or specify that it cannot be used for tuition or course-related expenses. 

Expenses that Don’t Qualify

Qualified education expenses do not include the cost of:

  • Room and board.
  • Travel.
  • Research.
  • Clerical help.
  • Equipment and other expenses that are not required for enrollment in or attendance at an eligible educational institution.

This is true even if the fee must be paid to the institution as a condition of enrollment or attendance. Scholarship or fellowship amounts used to pay these costs are taxable.

For more information, see Pub. 970.


Exclusions from Income


You may exclude certain educational assistance benefits from your income. That means that you won’t have to pay any tax on them. However, it also means that you can’t use any of the tax-free education expenses as the basis for any other deduction or credit, including the lifetime learning credit.

Employer-Provided Educational Assistance


If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include the benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2.

Educational Assistance Program

To qualify as an educational assistance program, the plan must be written and must meet certain other requirements. Your employer can tell you whether there is a qualified program where you work.

Educational Assistance Benefits

Tax-free educational assistance benefits include payments for tuition, fees and similar expenses, books, supplies, and equipment. The payments may be for either undergraduate- or graduate-level courses. The payments do not have to be for work-related courses. Educational assistance benefits do not include payments for the following items.

  • Meals, lodging, or transportation.
  • Tools or supplies (other than textbooks) that you can keep after completing the course of instruction.
  • Courses involving sports, games, or hobbies unless they:
    • Have a reasonable relationship to the business of your employer, or
    • Are required as part of a degree program.

Benefits over $5,250

If your employer pays more than $5,250 for educational benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income.

Working Condition Fringe Benefit 

However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages. A working condition fringe benefit is a benefit which, had you paid for it, you could deduct as an employee business expense. For more information on working condition fringe benefits, see Working Condition Benefits in chapter 2 of Publication 15-B, Employer's Tax Guide to Fringe Benefits.


Related Items:

 

Page Last Reviewed or Updated: 24-Jan-2014

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Hr block efile Publication 1212 - Introductory Material Table of Contents Future Developments Photographs of Missing Children IntroductionOrdering forms and publications. Hr block efile Tax questions. Hr block efile Useful Items - You may want to see: Future Developments For the latest information about developments related to Pub. Hr block efile 1212, such as legislation enacted after it was published, go to www. Hr block efile irs. Hr block efile gov/pub1212. Hr block efile Photographs of Missing Children The Internal Revenue Service is a proud partner with the National Center for Missing and Exploited Children. Hr block efile Photographs of missing children selected by the Center may appear in this publication on pages that would otherwise be blank. Hr block efile You can help bring these children home by looking at the photographs and calling 1-800-THE-LOST (1-800-843-5678) if you recognize a child. Hr block efile Introduction This publication has two purposes. Hr block efile Its primary purpose is to help brokers and other middlemen identify publicly offered original issue discount (OID) debt instruments they may hold as nominees for the true owners, so they can file Forms 1099-OID or Forms 1099-INT as required. Hr block efile The other purpose of the publication is to help owners of publicly offered OID debt instruments determine how much OID to report on their income tax returns. Hr block efile The list of publicly offered OID debt instruments (OID list) is on the IRS website. Hr block efile The original issue discount tables, Sections I-A through III-F, are only available on the IRS website at www. Hr block efile irs. Hr block efile gov/pub1212 by clicking the link under Recent Developments. Hr block efile The tables are posted to the website in late November or early December of each year. Hr block efile The information on these lists come from the issuers of the debt instruments and from financial publications and is updated annually. Hr block efile (However, see Debt Instruments Not on the OID List, later. Hr block efile ) Brokers and other middlemen can rely on this list to determine, for information reporting purposes, whether a debt instrument was issued at a discount and the OID to be reported on information returns. Hr block efile However, because the information in the list has generally not been verified by the IRS as correct, the following tax matters are subject to change upon examination by the IRS. Hr block efile The OID reported by owners of a debt instrument on their income tax returns. Hr block efile The issuer's classification of an instrument as debt for federal income tax purposes. Hr block efile Instructions for issuers of OID debt instruments. Hr block efile   In general, issuers of publicly offered OID debt instruments must, within 30 days after the issue date, report information about the instruments to the IRS on Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. Hr block efile See the form instructions for more information. Hr block efile Issuers should report errors in and omissions from the list in writing at the following address:  IRS OID Publication Project SE:W:CAR:MP:T  1111 Constitution Ave. Hr block efile NW, IR-6526 Washington, D. Hr block efile C. Hr block efile 20224 REMIC and CDO information reporting requirements. Hr block efile   Brokers and other middlemen must follow special information reporting requirements for real estate mortgage investment conduits (REMIC) regular, and collateralized debt obligations (CDO) interests. Hr block efile The rules are explained in Publication 938, Real Estate Mortgage Investment Conduits (REMICs) Reporting Information (And Other Collateralized Debt Obligations (CDOs)). Hr block efile   Holders of interests in REMICs and CDOs should see chapter 1 of Publication 550 for information on REMICs and CDOs. Hr block efile Comments and suggestions. Hr block efile   We welcome your comments about this publication and your suggestions for future editions. Hr block efile   You can write to us at the following address: Internal Revenue Service Tax Forms and Publications Division 1111 Constitution Ave. Hr block efile NW, IR-6526 Washington, DC 20224   We respond to many letters by telephone. Hr block efile Therefore, it would be helpful if you would include your daytime phone number, including the area code, in your correspondence. Hr block efile   You can send your comments from www. Hr block efile irs. Hr block efile gov/formspubs/. Hr block efile Click on “More Information” and then on “Comment on Tax Forms and Publications. Hr block efile ”   Although we cannot respond individually to each comment received, we do appreciate your feedback and will consider your comments as we revise our tax products. Hr block efile Ordering forms and publications. Hr block efile   Visit www. Hr block efile irs. Hr block efile gov/formspubs/ to download forms and publications, call 1-800-TAX-FORM (1-800-829-3676), or write to the address below and receive a response within 10 days after your request is received. Hr block efile Internal Revenue Service 1201 N. Hr block efile Mitsubishi Motorway Bloomington, IL 61705-6613 Tax questions. Hr block efile   If you have a tax question, check the information available on IRS. Hr block efile gov or call 1-800-829-1040. Hr block efile We cannot answer tax questions sent to any of the preceding addresses. Hr block efile Useful Items - You may want to see: Publication 515 Withholding of Tax on Nonresident Aliens and Foreign Entities 550 Investment Income and Expenses 938 Real Estate Mortgage Investment Conduits (REMICs) Reporting Information (And Other Collateralized Debt Obligations (CDOs)). Hr block efile Form (and Instructions) 1096 Annual Summary and Transmittal of U. Hr block efile S. Hr block efile Information Returns 1099-B Proceeds From Broker and Barter Exchange Transactions 1099-INT Interest Income 1099-OID Original Issue Discount 8949 Sales and Other Dispositions of Capital Assets Schedule B (Form 1040A or 1040) Interest and Ordinary Dividends Schedule D (Form 1040) Capital Gains and Losses W-8 Instructions for the Requester of Forms W-8BEN, W-8ECI, W-8EXP, and W-8IMY See How To Get Tax Help near the end of this publication for information about getting publications and forms. Hr block efile Prev  Up  Next   Home   More Online Publications