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Publication 225

Methods for Figuring Net Earnings(p74)

There are three ways to figure net earnings from self-employment.
  1. The regular method.
  2. The farm optional method.
  3. The nonfarm optional method.
You must use the regular method to the extent you don’t use one or both of the optional methods. See Figure 12-1, to see if you are eligible to use an optional method.

Figure 12-1. Can I Use the Optional Methods?


Why use an optional method?(p74)

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.

Effects of using an optional method.(p74)

Using an optional method could increase your SE tax. Paying more SE tax may result in you getting higher social security disability or retirement benefits.
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.
The optional methods may be used only to figure your SE tax. To figure your income tax, include your actual self-employment earnings in gross income, regardless of which method you use to determine SE tax.

Regular Method(p74)

To figure net earnings using the regular method, multiply your self-employment earnings by 92.35% (0.9235). For your net earnings figured using the regular method, see one of the following lines on your Schedule SE (Form 1040).
Net earnings figured using the regular method are also called "actual net earnings."

Farm Optional Method(p74)

Use the farm optional method only for self-employment earnings from a farming business. You can use this method if you meet either of the following tests.
  1. Your gross farm income is $7,560 or less.
  2. Your net farm profits are less than $5,457.

Gross farm income.(p74)

Your gross farm income is the total of the amounts from:

Net farm profits.(p74)

Net farm profits generally are the total of the amounts from:If you received social security retirement or disability benefits, you must subtract the amount of any Conservation Reserve Program payments included on your Schedule F, line 4b, or listed on Schedule K-1 (Form 1065), box 20, code Z. You may also need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. For more information, see Partnership income or loss, earlier.

Figuring farm net earnings.(p74)

If you meet either of the two tests explained above, use Table 12-1 to figure your net earnings from self-employment under the farm optional method.

Table 12-1. Figuring Farm Net Earnings

IF your gross farm income
THEN your net earnings are equal to...
$7,560 or lessTwo-thirds of your gross farm income.
More than $7,560$5,040

Optional method can reduce or eliminate SE tax.(p74)

If your gross farm income is $7,560 or less and your farm net earnings figured under the farm optional method are less than your actual farm net earnings, you can use the farm optional method to reduce or eliminate your SE tax. Your actual farm net earnings are your farm net earnings figured using the regular method, explained earlier.


Your gross farm income is $540 and your net farm profit is $460. Consequently, your net earnings figured under the farm optional method are $360 (2/3 of $540) and your actual net earnings are $425 (92.35% of $460). You owe no SE tax if you use the optional method because your net earnings under the farm optional method are less than $400.

Nonfarm Optional Method(p75)

This is an optional method available for determining net earnings from nonfarm self-employment, much like the farm optional method.
If you are also engaged in a nonfarm business, you may be able to use this method to figure your nonfarm net earnings. You can use this method even if you don’t use the farm optional method for determining your farm net earnings and even if you have a net loss from your nonfarm business. For more information about the nonfarm optional method, see Pub. 334.
You can’t combine farm and nonfarm self-employment earnings to figure your net earnings under either of the optional methods.

Using Both Optional Methods(p75)

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. You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. If you use both optional methods, you can report no more than $5,040 as your combined net earnings from self-employment.