Business Taxes

Net Earnings from Self-Employment

Net Earnings from Self-Employment and Net Profit on Schedule C, Line 31 are two different amounts. Self-employment tax is computed on Schedule SE where net earnings from self-employment is calculated.

Schedule C net profit is computed first. Next, Schedule C net profit is carried to Schedule SE, Line 2. From there, the Schedule C net profit is multiplied by a decimal (.9235 shown on Schedule SE, Line 4a) to derive net earnings from self-employment, which is entered on Line 4a.

Example:
  • Schedule C net profit $20,000.
  • $20,000 net profit carried to Schedule SE, Line 2.
  • Line 2 net profit of $20,000 combined with any amounts, if any, on Lines 1a and 1b.
  • Total of Lines 1a, 1b and 2 entered on Line 3.
  • Line 3 amount multiplied by .9235.
  • Assume no amounts on lines 1a and 1b.
  • Multiply Line 3 amount, $20,000, by .9235 = $18,470.
  • Enter $18,470, net earinings from self-employment, on Line 4a (the line that shows the .9235)

Items Not Included in Self-Employment Income

Items not Included in Self-employment Income:
  • Rent from real estate
  • Capital gains on the sale of property (unless the property is held for sale to customers in the ordinary course of business. For example, inventory).
  • Traders who buy and sell for their own account do not treat gains and losses from sales as self-employment income.
  • Dividends and interest on securities held for investment.
    • Dividends earned by dealers in securities and interest on accounts receivable are treated as self-employment income if the securities are not being held for investment.