Figuring Self-Employment Earnings

Farmer. If you are self-employed as a farmer, use Schedule F (Form 1040) to figure your self-employment earnings.

Partnership income or loss. If you are a partner 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). Box 14 of Schedule K-1 may also provide amounts for gross farming or fishing income (code B) and gross nonfarm income (code C). 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).

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.

If the amount reported is a loss, include only the deductible amount when you figure your total self-employment earnings.

For more information, see the Partner’s Instructions for Schedule K-1 (Form 1065).

For general information on partnerships, see Pub. 541.

More than one business. If you have self-employment earnings from more than one trade, business, or profession, you must generally

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combine the net profit or loss from each to determine your total self-employment earnings. A loss from one business reduces your profit from another business. However, don’t combine earnings from farm and nonfarm businesses if you are using one of the optional methods (discussed later) to figure net earnings.

Generally, an individual taxpayer with multiple businesses with self-employment income will fill out one Schedule SE (Form 1040) to report their total earnings. In addition, an individual spouse or business partner must each file their own Schedule SE (Form 1040) in order to pay the tax and receive credit for their social security earnings.

Community property. 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.

Payments for lost income. Include in self-employment earnings any payments you receive from insurance or other sources to replace income lost because you reduced or stopped farming activities. These include USDA payments under the Dairy Margin Coverage (DMC) Program, which provides dairy producers with payments when dairy margins are below the margin coverage levels. Go to USDA.gov for additional information about other USDA pro- grams. Even if you aren’t 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). A connection exists if it is clear the payment would not have been made but for your conduct of your farm business.

Gain or loss. A gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers isn’t included in self-employment earnings. It doesn’t matter whether the disposition is a sale, exchange, or involuntary conversion. For example, gains or losses from the disposition of the following types of property aren’t included in self-employment earnings.

• Investment property.

• Depreciable property or other fixed assets used in your trade or business.

• 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. Livestock does not include poultry.

• Unharvested standing crops sold with land held more than 1 year.

• 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.

A gain or loss from the cutting of timber isn’t included in self-employment earnings if the cutting is treated as a sale or exchange. For more information on electing to treat the cutting of timber as a sale or exchange, see Timber in chapter 8.

Wages and salaries. Wages and salaries received for services performed as an employee and covered by social security or railroad retire

ment aren’t included in self-employment earnings.

Wages paid in kind to you for agricultural labor performed as an employee, such as commodity wages, aren’t included in self-employment earnings.

Retired partner. Retirement income received by a partner from a partnership under a written plan isn’t included in self-employment earnings if all the following apply.

• The retired partner performs no services for the partnership during the year.

• The retired partner is owed only the retirement payments.

• The retired partner’s share (if any) of the partnership capital was fully paid to the retired partner.

• The payments to the retired partner are lifelong periodic payments.

Conservation Reserve Program (CRP) pay- ments. Under the CRP, if you own or operate highly erodible or other specified cropland, you may enter into a long-term contract with the USDA, agreeing to convert to a less intensive use of that cropland. You must include the annual rental payments and any one-time incentive payment you receive under the program on Schedule F, lines 4a and 4b, thereby increasing earnings subject to self-employment tax. Cost-share payments you receive may qualify for the cost-sharing exclusion. See Cost-Shar- ing Exclusion (Improvements) , earlier, in chap- ter 3. CRP payments are reported to you on Form 1099-G.

Individuals who are receiving social se-

TIP curity retirement or disability benefits

may exclude CRP payments when cal- culating SE tax. See the Instructions for Sched- ule SE (Form 1040).

Self-employed health insurance deduction. You can’t deduct the self-employed health insurance deduction you report on Schedule 1 (Form 1040), line 17, from self-employment earnings on Schedule SE (Form 1040).

Landlord Participation in Farming

As a general rule, income and deductions from rentals and from personal property leased with real estate aren’t included in determining self-employment earnings. 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.

Material participation for landlords. You materially participate if you have an arrangement with your tenant for your participation and you meet one or more of the following tests.

1. You do at least three of the following.

a. Pay, using cash or credit, at least half

the direct costs of producing the crop or livestock.

b. Furnish at least half the tools, equip ment, and livestock used in the production activities.

c. Advise or consult with your tenant on

something like deciding what crops to plant, the type of seed or fertilizer to use, or when and at what price the crops should be sold.

d. Inspect the production activities peri odically.

2. You regularly and frequently make, or take an important part in making, management decisions substantially contributing to or affecting the success of the enterprise. For example, you make decisions about when and where to plant or spray, when to harvest, what standards to follow, and what records to keep.

3. You work 100 hours or more spread over a period of 5 weeks or more in activities connected with agricultural production.

4. You do things that, considered in their totality, show you are materially and significantly involved in the production of the farm commodities.

These tests may be used as general guides for determining whether you are a material participant.

Crop shares. 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 above) at the time the crop shares are produced. Feeding such crop shares to livestock is considered using them. Your gross income for figuring your self-employment earnings includes the fair market value of the crop shares when they are used as feed.

Example. Nancy agrees to produce a crop on G. Cohen’s cotton farm, with each receiving half the proceeds. Cohen agrees to furnish all the necessary equipment, and it is understood that Cohen will advise Nancy on when to plant, spray, and pick the cotton. It is also understood that he will inspect the crop every few days to determine whether Nancy is properly taking care of the crop. Under their arrangement, it is further understood that Nancy will furnish all labor needed to grow and harvest the crop. Cohen provides the advice, makes inspections, and furnishes the equipment; Nancy furnishes all labor needed to grow and harvest the crop.

The management decisions made by Cohen in connection with the care of the cotton crop and his regular inspection of the crop establish that Cohen participates materially in the cotton production operations. The income Cohen receives from the cotton farm is included in Cohen’s self-employment earnings.