What is Net Earnings from Self-Employment?
Sole proprietors and partners are subject to self-employment tax if net earnings from self-employment is $400 or more.
If net earnings from self-employment is less than $400 you don't owe self-employment tax and don't have to file Schedule SE. (There is an exception if you had less than $400 and you had church employee income.)
What is Net Earnings From Self-Employment?
Keep in mind that Net Earnings from Self-Employment and Net Profit reported on Schedule C (or Schedule F or farming) are two different numbers. Schedule C (or F) net profit is computed firs. Then, net profit per Schedule C is carried to Schedule SE where self-employment tax is computed.
Net earnings from self-employment is figured by multiplying net profit carried from Schedule C, line 31 (or Schedule F line 34 for farmers) by a fixed percentage of 92.35% (.9235). The 92.35% is preprinted on Schedule SE, line 4 of "Section A-Short Schedule SE" and on line 4a of "Section B-Long Schedule SE".
- You show a net profit on line 31 of Schedule C of $20,000.
- Net earnings from self-employment is $18,470, computed as follows:
- $20,000 x .9235 equals $18,470
Note: The 92.35% adjustment is the equivalent of a 7.65% reduction of Schedule C net profit (100% minus 92.35% equals 7.65%) . The 7.65% is the rate that employers and employee each pay (one-half the total rate of 15.3%) for Social Security and Medicare taxes.
If net profit on Schedule C was $432 or less, net earnings from self-employment would be under $400 and no self-employment tax would be owed,
- Return to the Business Taxes Table of Contents to find related links