The net profit subject to SE tax is called net earnings from
Your net profit is shown on the lines of the following schedules.
Various types of income included in net earnings from
self-employment are discussed next. The list is not all inclusive.
- Taxable patronage dividends (distributions) from
- Government agricultural program payments, including
commodity program payments and conservation reserve program (CRP)
payments. (If you do not materially participate in farming operations
on the land, the CRP payment is not included in net earnings from
- Taxable Commodity Credit Corporation loans.
- Refunds and rebates, if they represent a reduction in a
deductible expense item, including a fuel tax credit included in
- Prizes or awards on farm produce or livestock.
- Crop damage payments.
- Value of property and services received for farm
- Sales of unharvested crops, if not sold with land that was
held more than 1 year.
- Rent you receive if you meet one of the four material
participation tests explained later under Landlord Participation
If you receive the rent as crop shares, you must meet the test at
the time the crop shares are produced. However, the crop shares are
included in net earnings from self-employment in the year they are
converted to money or the equivalent of money.
- Any amounts for depreciation, including any section 179
deduction, recaptured because the business use of the property was
reduced to 50% or less. This does not include amounts recaptured on
the disposition of property.
- Lost income payments received from insurance or other
sources for reducing or stopping farming activities. Even if you are
not farming when you receive the payment, it is included in net
earnings from self-employment if it relates to your farm business
(even though it is temporarily inactive). A connection exists if it is
clear the payment would not have been made but for your conduct of
your farm business.
- Your distributive share of income or loss, including
guaranteed payments, from your partnership or LLC's trade or
Income not included in net earnings from self-employment.
Certain kinds of income are not included in net earnings from
self-employment, even though they are included when figuring your
- Rental income you receive from real estate and from personal
property leased with real estate is not included in net earnings from
self-employment. It does not matter if the rent is received in crop
shares, cash, or other property. This rule applies if the landlord
does not materially participate in the production or
management of production of farm products on the land. If the landlord
materially participates, see Landlord Participation in Farming,
- Interest is not included in net earnings from
self-employment unless you receive it in your trade or business, such
as interest on accounts receivable.
- Dividends on securities you own are not included in net
earnings from self-employment unless you are a dealer in securities
who is not holding the securities for speculation or
- A gain or loss from the disposition of property that is
neither stock in trade nor held primarily for sale to customers is not
included in net earnings from self-employment. It does not matter
whether the disposition is a sale, exchange, or involuntary
conversion. For example, gains or losses from the disposition of the
following types of property are not included in net earnings from
- Investment property.
- Depreciable property or other fixed assets used in your
trade or business.
- Livestock held for draft, dairy, breeding, or sporting
purposes, and not held primarily for sale, regardless of how long the
livestock was held, or whether it was raised or purchased.
crops sold with land held more
than one year.
- Timber, coal, or iron ore held for more than one year if an
economic interest was retained, such as a right to receive coal
A gain or loss from the cutting of timber is not included in net
earnings from self-employment if the cutting is treated as a sale or
- Wages and salaries received for services performed as an
employee and covered by social security or railroad retirement are not
included in net earnings from self-employment.
- Wages paid in kind to you for agricultural labor, such as
commodity wages, are not included in net earnings from
- A limited partner's distributive share of partnership income
(or loss) is not used to figure net earnings from self-employment.
However, guaranteed payments, such as salary and professional fees
received for services performed by a limited partner, are included in
net earnings from self-employment.
- Retirement income received by the partner from his or her
partnership under a written plan is not included in net earnings from
self-employment if all the following apply.
- The retired partner performs no services for the partnership
during the year.
- The retired partner is owed only the retirement
- The retired partner's share (if any) of the partnership
capital was fully paid to the retired partner.
- The payments to the retired partner are lifelong, periodic
As a general rule, income and deductions from rentals and from
personal property leased with real estate are not included in
determining net self-employment income. However, income and deductions
from farm rentals, including government commodity program payments
received by a landowner who rents land, are included if the rental
arrangement provides that the landlord will, and he or she does,
materially participate in the production or management of production
of the farm products on the land.
Rent paid in the form of crop shares is included in self-employment
income for the year you sell, exchange, give away, or use the crop
shares if you meet one of the four material participation tests at the
time the crop shares are produced. Feeding such crop shares to
livestock is considered using them. Your gross income for figuring
your net earnings from self-employment under the Farm Optional
Method includes the fair market value of the crop shares when
they are used as feed.
You materially participate if you have an arrangement with your
tenant for your participation and you meet one of the following tests.
- You do any three of the following.
- Pay, using cash or credit, at least half the direct costs of
producing the crop or livestock.
- Furnish at least half the tools, equipment, and livestock
used in the production activities.
- Advise or consult with your tenant.
- Inspect the production activities periodically.
- You regularly and frequently make, or take an important part
in making, management decisions substantially contributing to or
affecting the success of the enterprise.
- You work 100 hours or more spread over a period of 5 weeks
or more in activities connected with agricultural production.
- You do things which, considered in their totality, show that
you are materially and significantly involved in the production of the
These tests may be used as general guides for determining
whether you are a material participant.
Drew Houston agrees to produce a crop on J. Clarke's cotton farm
with each receiving half the proceeds. Clarke furnishes all the
necessary equipment and advises Houston when to plant, to chop, plow,
spray, and pick the cotton. During the growing season, Clarke inspects
the crop every few days to determine whether Houston is properly
taking care of the crop. Houston furnishes all labor needed to grow
and harvest the crop.
The management decisions made by J. Clarke in connection with the
care of the cotton crop and his regular inspection of the crop, along
with all the necessary equipment he furnishes, establish that he
participates to a material degree in the cotton production operations.
The income Clarke receives from his cotton farm is included in
computing his net earnings from self-employment.