Tax Tip – Net Earnings from Self-Employment Calculation (Items Included and Deducted)

Tax Tips provided by Don Fitch, CPA

In General: Certain items are included and deducted in determining net earnings from self-employment.

The following items are included in the calculation of net earnings from self-employment:

(1) Rental income from a farm if, as landlord, the taxpayer materially participated in the production or management of the production of farm products on this land. This income is farm earnings. To determine whether the taxpayer materially participated in farm management or production, the activities of any agent who acted for the taxpayer are not considered.

(2) Cash or a payment-in-kind from the Department of Agriculture for participating in a land diversion program.

(3) Payments for the use of rooms or other space when the taxpayer also provided substantial services for the convenience of the taxpayer’s tenants. Examples are hotel rooms, boarding houses, tourist camps or homes, trailer parks, parking lots, warehouses, and storage garages.

(4) Income from the retail sale of newspapers and magazines if the taxpayer was age 18 or older and kept the profits.

(5) Income the taxpayer receives as a direct seller. Newspaper carriers or distributors of any age are direct sellers if certain conditions apply.

(6) Amounts received by current or former self-employed insurance agents and salespersons that are:

(a) paid after retirement but figured as a percentage of commissions received from the paying company before retirement;

(b) renewal commissions; or

(c) deferred commissions paid after retirement for sales made before retirement.

However, certain termination payments received by former insurance salespersons are not included in net earnings from self-employment.

(7) Income of certain crew members of fishing vessels with crews of normally fewer than 10 people.

(8) Fees as a state or local government employee if the taxpayer was paid only on a fee basis and the job was not covered under a federal-state social security coverage agreement.

(9) Interest received in the course of any trade or business, such as interest on notes or accounts receivable.

(10) Generally, fees and other payments received by the taxpayer for services as a member of the board of directors of a corporation (Revenue Ruling 57-246; Revenue Ruling 68-595; Revenue Ruling 72-86), but see discussion below.

(11) Recapture amounts under Code Section 179 and Code Section 280F that the taxpayer included in gross income because the business use of the property dropped to 50 percent or less. Amounts the taxpayer recaptured on the disposition of property are not included.

(12) Fees the taxpayer received as a professional fiduciary. This may also apply to fees paid to the taxpayer as a nonprofessional fiduciary if the fees relate to active participation in the operation of the estate’s business, or the management of an estate that required extensive management activities over a long period of time.

(14) Gain or loss from Code Section 1256 contracts or related property by an options or commodities dealer in the normal course of dealing in or trading Code Section 1256 contracts (Instruction to Form 1040 SE).

While fees paid to a member of a corporation’s board of directors are generally considered payments to an independent contractor and thus reportable on Schedule SE, whether a director is also an employee subject to W-2 reporting depends primarily on whether the director performs services for the corporation that are not directorial in nature and on whether those services are performed in an employee capacity (Jacobs v. Commissioner, Tax Court Memo. 1993-570; Revenue Ruling 82-83).

The following items are deducted in the calculation of net earnings from self-employment:

  1. The Code Section 179 deduction is subtracted from net self-employment earnings to the extent allowable in calculating the self-employment tax (Revenue Ruling 65-272). The amount comes over to Schedule C from the Form 4562, Depreciation and Amortization. The Schedule C amount is then carried over to Form 1040, Schedule SE, Self-Employment Tax.
  2. In addition, the small business health insurance deduction is also deductible in computing self-employment tax (Instructions to Form 8941).

Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.

DON FITCH, CPA
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Palm Desert, CA 92260

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This blog post is intended to serve solely as an aid in continuing tax education for Don Fitch Accountancy blog, podcast, and/or email members. Due to the constantly changing nature of the subject of the materials, this product is not appropriate to serve as the sole resource for any federal tax, accounting opinion, tax return position, and must be supplemented for such purposes with other current authoritative materials. The information in this blog post has been carefully compiled from sources believed to be reliable, but its accuracy is not guaranteed. In addition, Don Fitch Accountancy is not engaged in rendering legal or other professional services and will not be held liable for any actions or suits based on this blog post, podcast, and/or email, or comments made during the above presentation. If legal advice or other expert assistance is required, seek the services of a competent professional.

(Updated 03/07/2021 06:48)

Published by Don Fitch, CPA

Offers in Compromise, Wage Levy Releases, Installment Agreements, IRS Audits, and much more IRS assistance. Also, allow us to Help you complete your Tax Returns from 1913 to present (100+ Years) and for any of the 50 States.

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