Special Rule for Self-employed Individuals

NII doesn’t include any item taken into account in determining self-employment income subject to tax under section 1401(b) for the tax year. See section 1411(c)(6).

This includes income from farming and nonfarming activities that is subject to self-employment tax under section 1401(b). See the Instructions for Schedule SE (Form 1040).

Included in figuring income from self-employment are income and allowable deductions in figuring net income from self-employment. Amounts reported to a general or limited partner in a partnership should include the amount of net earnings from self-employment reported on your Schedule K-1 (Form 1065). However, income that is excepted from self-employment, described in sections 1402(a)(1) through (17), is included in NII if described in Regulations section 1.1411-4. Certain types of income excluded from self-employment tax, such as capital gains and other items specifically excluded from self-employment income under section 1402(a), are included in NII if the income otherwise meets the definition of NII. See, generally, Regulations section 1.1411-9.

Example. If an individual taxpayer has $90,000 of trade or business income, but $1,000 of the income is attributable to the sale of a capital asset (which is excluded from net earnings from self employment under section 1402(a)(3)(A)), the taxpayer only pays the tax imposed by section 1401(b) on $89,000. The $1,000 from the sale of the capital asset is subject to NIIT. (However, if the sale of the capital asset was an asset used in a non-section 1411 trade or business, the capital gain would also be excluded from NII under section 1411(c)(1)(A)(iii).) See Regulations section 1.1411-9(b).