What Forms Must You File?

If you have a fishing trade or business, you may need to file the following forms.

Schedule C (Form 1040)

Use Schedule C (Form 1040) to figure your net profit or loss from a fishing business you operate or a trade you practice as a self-employed individual. To figure your net profit or loss, subtract your deductible fishing expenses from your gross income from fishing. File Schedule C with your Form 1040.

You may be able to use the simpler Schedule C-EZ (Form 1040) instead of Schedule C if you made a profit and had fishing expenses of $2,500 or less. For more information, see Part I of Schedule C-EZ.

Who is self-employed? You are self-employed if you own an unincorporated business or practice a trade by yourself. You do not have to carry on regular full-time business activities to be self-employed. Your trade or business may consist of part-time work, including work you do in addition to your regular job.

If you work on a fishing boat with an operating crew normally made up of fewer than 10 individuals, you may be considered self-employed. For more information, see Which fishermen are considered self-employed? under Form 1099-MISC, later.

Table 1 - Employment Tax Treatment of Fishing Activities and Certain Fishermen

What is a trade or business? A trade or business is generally an activity that is your livelihood or that you do in good faith to make a profit. The facts and circumstances of each case determine whether or not an activity is a trade or business. Regularity of activities and transactions and the production of income are important elements. You do not need to actually make a profit to be in a trade or business as long as you have a profit motive. You do need, however, to make ongoing efforts to further the interests of your business.

Husband and wife partners. You and your spouse may operate a fishing business together. If you and your spouse join together in the conduct of a business and share in the profits and losses, you have created a partnership. You and your spouse must report the business income and expenses on Form 1065, U.S. Return of Partnership Income. The income should not be reported on a Schedule C. For more information, see Publication 541, Partnerships.

Not-for-profit fishing. You must fish to make a profit in order to report your fishing income and expenses on Schedule C. You do not need to actually make a profit as long as you are making a good faith effort. If you are not fishing for profit, report your fishing income and expenses as explained under Not-for-Profit Activities in chapter 1 of Publication 535.

More information. For specific information on completing Schedule C, see Schedule C Example and the filled-in Schedule C, later.

Schedule SE (Form 1040)

Use Schedule SE (Form 1040) to report and figure your self-employment tax. See Self-employment tax (SE tax), later. Most fishermen can use Short Schedule SE (Section A) to figure their self-employment tax. You must file Schedule SE with your Form 1040 if you were self-employed and your net earnings from self-employment were $400 or more.

Even if you do not have to file Schedule SE, it may be to your benefit to file it and use an optional method in Part II of Long Schedule SE (Section B). For more information, see Optional methods, later.

Self-employment tax (SE tax). The SE tax is a social security and Medicare tax primarily for individuals who work for themselves. It is similar to the social security and Medicare taxes withheld from the pay of wage earners.

Social security coverage. Your payments of SE tax contribute to your coverage under the social security system. Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Social security benefits are available to self-employed persons just as they are to wage earners.

You must be insured under the social security system before you begin receiving social security benefits. You are insured if you have the required number of credits (also called quarters of coverage).

Earning credits in 2001 and 2002. You can earn a maximum of four credits per year. For 2001, you earn one credit for each $830 ($870 for 2002) of income subject to social security taxes. You need $3,320 ($830 x 4) of self-employment income and wages to earn four credits in 2001. For 2002, you will need $3,480 ($870 x 4) of self-employment income and wages to earn four credits.

For an explanation of the number of credits you must have to be insured and the benefits available to you and your family under the social security program, contact your nearest Social Security Administration (SSA) office.

Optional methods. You may want to use one of the optional methods in Part II of Long Schedule SE (Section B) when you have a loss or a small net profit and any of the following apply.

• You want to receive credit for social security benefit coverage.
• You incurred child or dependent care expenses for which you could claim a credit (this method may increase your earned income, which could increase your credit for these expenses).
• You are entitled to the earned income credit (this method may increase your earned income, which could increase your earned income credit).

Using the optional methods will increase your SE tax.

Estimated tax. You may have to pay estimated tax. This depends on how much income and SE taxes you expect for the year and how much of your income will be subject to withholding. The SE tax is treated and collected as part of the income tax. For more information, see When Do Fishermen Pay Estimated Tax and File Tax Returns, later.

Reporting self-employment tax. Figure your SE tax on Schedule SE. Then report the tax on line 53 of Form 1040 and attach Schedule SE to Form 1040. If you file a joint return and you both have SE income, each of you must complete a separate Schedule SE.

Husband-wife partnership. If you and your spouse operate a fishing business as a partnership, each of you should include your respective share of SE income on a separate Schedule SE.

However, if your spouse is not your partner, but your employee, you must pay employment taxes for him or her. For more information, see Employment Tax Forms, later.

Self-employment tax deduction. You can deduct one-half of your SE tax as a business expense in figuring your adjusted gross income. This deduction only affects your income tax. It does not affect either your net earnings from self-employment or your SE tax.

To deduct the tax, enter on Form 1040, line 27, the amount shown on the "Deduction for one-half of self-employment tax" line of the Schedule SE.

More information. For more information on self-employment tax, see Publication 533.

Form 1099-MISC

File Form 1099-MISC for each person to whom you have paid the following during the year.

1. A share of your catch (or a share of the proceeds from the sale of your catch) to an individual who is not your employee (self-employed). For information about individuals considered to be self-employed, see Which fishermen are considered self-employed, later.
2. At least $600 in rents, services, and other income payments to an individual who is not your employee (self-employed).
3. Cash payments of at least $600 to a commercial fisherman for the purchase of fish for resale. See the instructions for Form 1099-MISC for definitions of "cash" and "fish" and for information about the recordkeeping requirements for resale buyers.
4. Cash payments of up to $100 per trip that are:
1. Dependent on a minimum catch,
2. Paid solely for additional duties for which additional cash payments are traditional in the fishing industry, and
3. Not otherwise reportable as wages.

Which fishermen are considered self-employed? Certain fishermen who work on a fishing boat are considered to be self-employed for purposes of employment and self-employment taxes. A fisherman is considered self-employed if he meets all of the following conditions.

1. He receives a share of the catch or a share of the proceeds from the sale of the catch.
2. His share depends on the amount of the catch.
3. He receives his share from a boat (or from each boat in the case of a fishing operation involving more than one boat) with an operating crew normally made up of fewer than 10 individuals. This requirement is considered to be met if the average number of crew members on trips the boat made during the last 4 calendar quarters was less than 10.
4. He does not get any money for his work (other than his share of the catch or of the proceeds from the sale of the catch), unless the pay meets all of the following conditions.
1. He does not get more than $100 per trip.
2. He is paid only if there is a minimum catch.
3. He is paid solely for additional duties (such as for services performed as mate, engineer, or cook) for which additional cash payments are traditional in the fishing industry.

Example 1. You hire a captain, a mate, an engineer, a cook, and five other crew members to work on your fishing boat. The proceeds from the sale of the catch offset boat operating expenses such as bait, ice, and fuel. You divide 60% of the balance among the captain, the mate, and the crew members. You divide the other 40% between yourself and the captain. The mate, the engineer, and the cook also each receive an extra $100 for each trip that brings back a certain minimum catch. The crew members do not receive any additional pay between voyages, but they must do certain work, such as repairing nets, splicing cable, and transporting the catch.

For purposes of employment and self-employment taxes, each crew member (including the captain, mate, engineer, and cook) is considered self-employed. You must file Form 1099-MISC to report amounts you pay to them.

Example 2. The facts are the same as in Example 1 except that all the crew members but the captain receive an extra $100 for each trip that brings back a certain minimum catch.

For purposes of employment and self-employment taxes, the captain, the mate, the engineer, and the cook are self-employed individuals. The other five crew members who receive this extra payment in addition to the proceeds from the sale of the catch are employees. They are employees because the $100 payment is not paid solely for additional duties for which additional cash pay is traditional in the fishing industry.

Employment Tax Forms

You are generally required to withhold federal income tax, social security tax, and Medicare tax from your employee's wages. You also must pay the employer's share of social security and Medicare taxes. In addition, you may be required to pay federal unemployment tax under the Federal Unemployment Tax Act (FUTA). If you have employees, you will need to file forms to report these employment taxes. For more information, see Publication 15, which explains your payroll tax responsibilities as an employer.

To help you determine whether the people working for you are your employees, see Publication 15-A. It has information to help you determine whether an individual is an independent contractor or an employee.

If you incorrectly classify an employee as an independent contractor, you can be held liable for employment taxes for that worker, plus a penalty.

An independent contractor is someone who is self-employed. You do not generally have to withhold or pay any taxes on payments to an independent contractor.

Individuals you employ to work on a boat that normally has an operating crew of fewer than 10 individuals may be considered self-employed. For more information, see Which fishermen are considered self-employed? under Form 1099-MISC, earlier.

Table 1. See Table 1 for information on the employment tax treatment of fishing activities and certain fishermen.

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