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?

Net Earnings from Self-Employment and Net Profit reported on Schedule C (or Schedule F for farming) are two different numbers. Schedule C (or F) net profit is computed first. 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".

Example:

  • 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

FICA stands for Federal Insurance Contributions Act and is referred to as the federal payroll tax (or employment tax). FICA taxes fund Social Security and Medicare, which are federal programs that provide benefits for retirees, the disabled, and children of deceased workers..

The total FICA rate is 15.3%. Employers and employees each pay one-half the 15.3% (7.65% each). Self-employed persons, on the other hand, are subject to the entire 15.3% rate. The 92.35% adjustment on Form SE serves to reduce the Schedule C net profit by 7.65% (100% minus 92.35% equals 7.65%). Self-employed persons get to deduct one-half the self-employment tax reported on Schedule SE on the front of Form 1040 as an above-the-line deduction, which lowers adjusted gross income (AGI).

Note that, if net profit on Schedule C is $432 or less, net earnings from self-employment would be under $400 (,9235 x $432 = $398.95) and no self-employment tax would be owed.

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