Publication 533: Self- Employment Tax; Publication 533 Main Contents

This is archived information that pertains only to the 2003 Tax Year. If you
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What Is Self-Employment Tax?

Self-employment tax (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 most wage earners.

You figure SE tax yourself using Schedule SE (Form 1040). Social security and Medicare taxes of most wage earners are figured by their employers. Also, you can deduct half of your SE tax in figuring your adjusted gross income. Wage earners cannot deduct social security and Medicare taxes.

SE tax rate.

The self-employment tax rate is 15.3%. The rate consists of two parts: 12.4% for social security (old-age, survivors, and disability insurance) and 2.9% for Medicare (hospital insurance).

Maximum earnings subject to SE tax.

Only the first $87,000 of your combined wages, tips, and net earnings in 2003 is subject to any combination of the 12.4% social security part of SE tax, social security tax, or railroad retirement (tier 1) tax.

All your combined wages, tips, and net earnings in 2003 are subject to any combination of the 2.9% Medicare part of SE tax, social security tax, or railroad retirement (tier 1) tax.

Fiscal year filer.

If you use a tax year other than the calendar year, you must use the tax rate and maximum earnings limit in effect at the beginning of your tax year. Even if the tax rate or maximum earnings limit changes during your tax year, continue to use the same rate and limit throughout your tax year.

Self-employment tax deduction.

You can deduct half of your SE tax 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 28, the amount shown on the Deduction for one-half of self-employment tax line of the Schedule SE.

Why Pay Self-Employment Tax?

Social security benefits are available to self-employed persons just as they are to wage earners. 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.

By not reporting all your self-employment income, you could cause your social security benefits to be lower when you retire.

How to become insured under social security.

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). It does not matter whether the income is earned in one quarter or is spread over two or more quarters.

Earning credits in 2003 and 2004.

You can earn a maximum of four credits per year. For 2003, you earn one credit for each $890 ($900 for 2004) of income subject to social security taxes. You need $3,560 ($890 × 4) of self-employment income and wages to earn four credits in 2003. For 2004, you will need $3,600 ($900 × 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, consult your nearest Social Security Administration (SSA) office.

Making false statements to get or to increase social security benefits may subject you to penalties.

The Social Security Administration (SSA) time limit for posting self-employment income.

Generally, the SSA will give you credit only for self-employment income reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. If you file your tax return or report a change in your self-employment income after this time limit, the SSA may change its records, but only to remove or reduce the amount. The SSA will not change its records to increase your self-employment income.

To pay SE tax, you must have a social security number (SSN) or an individual taxpayer identification number (ITIN). This section explains how to:

If you never had an SSN, apply for one using Form SS–5, Application for a Social Security Card. The application is also available in Spanish. You can get this form at any Social Security office or by calling 1–800–772–1213.

You can also download Form SS–5 from the Social Security Administration website at www.ssa.gov.

If you have a social security number from the time you were an employee, you must use that number. Do not apply for a new one.

The IRS will issue you an ITIN if you are a nonresident or resident alien and you do not have and are not eligible to get an SSN. To apply for an ITIN, file Form W–7, Application for IRS Individual Taxpayer Identification Number. The application is also available in Spanish. You can get this form by calling 1–800–829–3676.

Estimated tax is the method used to pay tax (including SE tax) on income not subject to withholding. You generally have to make estimated tax payments if you expect to owe tax, including SE tax, of $1,000 or more when you file your return. Use Form 1040–ES, Estimated Tax for Individuals, to figure and pay the tax.

You must pay SE tax and file Schedule SE (Form 1040) if either of the following applies.

Your net earnings from self-employment are based on your earnings subject to SE tax. Most earnings from self-employment are subject to SE tax. Some earnings from employment (certain earnings that are not subject to social security and Medicare taxes) are subject to SE tax. This section provides information to help you determine whether you have earnings subject to SE tax.

If you have earnings subject to SE tax, use Schedule SE to figure your net earnings from self-employment. Before you figure your net earnings, you generally need to figure your total earnings subject to SE tax. For more information, see Figuring Earnings Subject to Self-Employment Tax and Methods for Figuring Net Earnings, later.

The SE tax rules apply no matter how old you are and even if you are already receiving social security or Medicare benefits.

Independent contractor.

People such as doctors, dentists, veterinarians, lawyers, accountants, contractors, subcontractors, public stenographers, or auctioneers who are in an independent trade, business, or profession in which they offer their services to the general public are generally independent contractors. However, whether these people are independent contractors or employees depends on the facts in each case. The general rule is that an individual is an independent contractor if the payer has the right to control or direct only the result of the work and not what will be done and how it will be done. The earnings of a person who is working as an independent contractor are subject to SE tax.

You are not an independent contractor if you perform services that can be controlled by an employer (what will be done and how it will be done). This applies even if you are given freedom of action. What matters is that the employer has the legal right to control the details of how the services are performed.

If an employer-employee relationship exists (regardless of what the relationship is called), you are not an independent contractor and your earnings are generally not subject to SE tax. However, your earnings as an employee may be subject to SE tax under other rules discussed in this section.

For more information on determining whether you are an independent contractor or an employee, see Publication 15–A.

This section provides information to help you determine whether your earnings from one of the following occupations are subject to SE tax.

Income paid by an insurance company to a retired self-employed insurance agent based on a percentage of commissions received before retirement is subject to SE tax. Also, renewal commissions and deferred commissions for sales made before retirement are generally subject to SE tax.

However, renewal commissions paid to the survivor of an insurance agent are not subject to SE tax.

Termination payments you receive as a former self-employed insurance agent from an insurance company because of services you performed for that company are exempt from SE tax if all the following conditions are met.

If you are a member of the crew on a boat that catches fish or other water life, your earnings are subject to SE tax if all the following conditions apply.

You are not subject to SE tax if you are under age 18 and you are working for your father or mother.

You are a direct seller and your earnings are subject to SE tax if all the following conditions apply.

This rule applies whether or not you hire others to help you make deliveries. It also applies whether you buy the papers from the publisher or are paid based on the number of papers you deliver.

If you are 18 or older and you sell newspapers or magazines, your earnings are subject to SE tax if all the following conditions apply.

This rule applies whether or not you are guaranteed a minimum amount of earnings. It also applies whether or not you receive credit for unsold newspapers or magazines you return to your supplier.

Fees you receive for services you perform as a notary public are not subject to SE tax.

Public officials generally are not subject to SE tax on what they earn for serving in public office. This rule applies to payments received by an elected tax collector from state funds on the basis of a fixed percentage of the taxes collected. Public office includes any elective or appointive office of the United States or its possessions, the District of Columbia, a state or its political subdivisions, or a wholly owned instrumentality of any of these.

If you are a licensed real estate agent or a direct seller, your earnings may be subject to SE tax if both the following apply.

If you are a dealer in options or commodities, your gains and losses from dealing or trading in section 1256 contracts (regulated futures contracts, foreign currency contracts, nonequity options, dealer equity options, and dealer securities futures contracts) or property related to those contracts (such as stock used to hedge options) are subject to SE tax. For more information, see sections 1256 and 1402(i) of the Internal Revenue Code.

If you administer a deceased person's estate, your fees are subject to SE tax if you are one of the following.

Report fees that are subject to SE tax on Schedule C or C–EZ (Form 1040). If the fees are not subject to SE tax, report them on line 21 of Form 1040.

You generally are subject to SE tax on earnings for services you perform as a minister, Christian Science practitioner, or member of a religious order who has not taken a vow of poverty. But you can get an exemption from SE tax on certain earnings by filing Form 4361.

If you belong to a recognized religious group opposed to insurance, you may qualify for an exemption from the SE tax. To qualify, you must be conscientiously opposed to accepting the benefits of any public or private insurance that makes payments because of death, disability, old age, retirement, or medical care, or that provides services for medical care. If you buy a retirement annuity from an insurance company, you will not be eligible for this exemption. Religious opposition based on group teachings is the only legal basis for the exemption. In addition, your religious group (or division) must have existed since December 31, 1950.

To get the exemption, you must file in triplicate Form 4029 and waive all social security benefits.

You are a trader in securities if you are engaged in the business of buying and selling securities for your own account. As a trader in securities, your gain or loss from the disposition of securities is not subject to SE tax. However, see Dealer in Securities, earlier, for an exception that applies to section 1256 contracts. For more information about traders in securities, see Publication 550, Investment Income and Expenses.

Generally, you need to figure your total earnings subject to SE tax before you can figure your net earnings from self-employment. This section will help you figure these total earnings.

If you have earnings subject to SE tax from more than one trade, business, or profession, you must combine the net profit (or loss) from each to determine your total earnings subject to SE tax. A loss from one business reduces your profit from another business.

If any of the income from a trade or business, other than a partnership, is community income under state law, it is included in the earnings subject to SE tax of the spouse carrying on the trade or business. The identity of the spouse carrying on the trade or business is determined by the facts in each case. (Partnership income or loss is discussed later.)

Do not include in earnings subject to SE tax a gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers. It does not matter whether the disposition is a sale, exchange, or an involuntary conversion. For example, gains or losses from the disposition of the following types of property are not included in earnings subject to SE tax.

A gain or loss from the cutting of timber is not included in earnings subject to SE tax if the cutting is treated as a sale or exchange. For more information on electing to treat the cutting of timber as a sale or exchange, see Timber in chapter 2 of Publication 544, Sales and Other Dispositions of Assets.

If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost business income is included in earnings subject to SE tax. If you are not working when you receive the payment, it still relates to your business and is included in earnings subject to SE tax, even though your business is temporarily inactive.

If there is a connection between any payment you receive and your trade or business, the payment is included in earnings subject to SE tax. A connection exists if it is clear the payment would not have been made but for your conduct of the trade or business.

If you are a member of a partnership that carries on a trade or business, the partnership should report your earnings subject to SE tax on line 15a of your Schedule K–1 (Form 1065) or in box 9 of your Schedule K–1 (Form 1065–B). The partnership can use the worksheet in the form instructions to figure these earnings.

If you are a general partner, you may need to reduce these reported earnings by amounts you claim as a section 179 deduction, unreimbursed partnership expenses, or depletion on oil and gas properties.

If the amount reported is a loss, include only the deductible amount when you figure your total earnings subject to SE tax.

For more information, see the Partner's Instructions for Schedule K–1. For general information on partnerships, see Publication 541.

This section provides information to help you determine whether your earnings are subject to SE tax if you are one of the following.

Rental income from real estate and personal property leased with real estate is not included in earnings subject to SE tax unless either of the following applies to you.

Examples of services that are for the tenants' convenience include supervising and maintaining a recreational hall provided by the park, distributing a monthly newsletter to tenants, operating a laundry facility, and helping tenants buy or sell their trailers.

Examples of services that are normally provided to maintain the lots in a condition for tenant occupancy include city sewerage, electrical connections, and roadways.

If you have income from self-employment in a U.S. possession, include it in earnings subject to SE tax even if your U.S. possession income is exempt from U.S. income tax.

If you receive payments under a research grant and perform services for the grantor as an independent contractor, the payments you receive are subject to SE tax.

For more information about whether you are an independent contractor, see Independent contractor, earlier.

Wages and salaries received for services performed as an employee and covered by social security or railroad retirement are not included in earnings subject to SE tax. Tips received for similar services as an employee also are not included in earnings subject to SE tax. Tips you receive as a self-employed person from your business for services you perform are subject to SE tax.

You must use the regular method unless you are eligible to use one or both of the optional methods. (See Figure 1.)

Multiply your total earnings subject to SE tax by 92.35% (.9235) to get your net earnings under the regular method. See Short Schedule SE , line 4, or Long Schedule SE , line 4a.

Net earnings figured using the regular method are also called actual net earnings.

Use the nonfarm optional method only for earnings that do not come from farming. You may use this method if you meet all the following tests.

If you meet the three tests explained earlier, use the following table to figure your net earnings from self-employment under the nonfarm optional method.

Gross income of $2,400 or less.

The following examples illustrate how to figure net earnings when gross nonfarm income is $2,400 or less.

Example 1—net nonfarm profit less than $1,733 and less than 72.189% of gross nonfarm income.

Ann Green runs a craft business. Her actual net earnings from self-employment were $800 in 2001 and $900 in 2002. She meets the test for being self-employed on a regular basis. She has used the nonfarm optional method less than 5 years. Her gross income and net profit in 2003 are as follows:

Gross income	$2,100
Net profit	$1,200

Ann's actual net earnings for 2003 are $1,108 ($1,200 × .9235). Because her net profit is less than $1,733 and less than 72.189% of her gross income, she can use the nonfarm optional method to figure net earnings of $1,400 (⅔ × $2,100). Because these net earnings are higher than her actual net earnings, she can report net earnings of $1,400 for 2003.

Example 2—net nonfarm profit less than $1,733 but not less than 72.189% of gross nonfarm income.

Assume that in Example 1 Ann's gross income is $1,000 and her net profit is $800. She must use the regular method to figure her net earnings. She cannot use the nonfarm optional method because her net profit is not less than 72.189% of her gross income.

Example 3—net loss from a nonfarm business.

Assume that in Example 1 Ann has a net loss of $700. She can use the nonfarm optional method and report $1,400 (⅔ × $2,100) as her net earnings.

Example 4—net earnings less than $400.

Assume that in Example 1 Ann has gross income of $525 and a net profit of $175. In this situation, she would not pay any SE tax under either the regular method or the nonfarm optional method because her net earnings under both methods are less than $400.

Gross income of more than $2,400.

The following examples illustrate how to figure net earnings when gross nonfarm income is more than $2,400.

Example 1—net nonfarm profit less than $1,733 and less than 72.189% of gross nonfarm income.

John White runs an appliance repair shop. His actual net earnings from self-employment were $10,500 in 2001 and $9,500 in 2002. He meets the test for being self-employed on a regular basis. He has used the nonfarm optional method less than 5 years. His gross income and net profit in 2003 are as follows:

Gross income	$12,000
Net profit	$1,200

John's actual net earnings for 2003 are $1,108 ($1,200 × .9235). Because his net profit is less than $1,733 and less than 72.189% of his gross income, he can use the nonfarm optional method to figure net earnings of $1,600. Because these net earnings are higher than his actual net earnings, he can report net earnings of $1,600 for 2003.

Example 2—net nonfarm profit not less than $1,733.

Assume that in Example 1 John's net profit is $1,800. He must use the regular method. He cannot use the nonfarm optional method because his net nonfarm profit is not less than $1,733.

Example 3—net loss from a nonfarm business.

Assume that in Example 1 John has a net loss of $700. He can use the nonfarm optional method and report $1,600 as his net earnings from self-employment.

Use the farm optional method only for earnings from a farming business. You can use this method if you meet either of the following tests.

If you meet either of the two tests explained earlier, use the following table to figure your net earnings from self-employment under the farm optional method.

If you have both farm and nonfarm earnings, you may be able to use both optional methods to determine your 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 $1,600 as your combined net earnings from self-employment.

Use Schedule SE (Form 1040) to figure and report your SE tax. Then enter the SE tax on line 55 of Form 1040 and attach Schedule SE to Form 1040.

Most taxpayers can use Section A—Short Schedule SE to figure their SE tax. However, certain taxpayers must use Section B—Long Schedule SE. Use the chart on page 1 of Schedule SE (reproduced later) to find out which one to use.

If you have to pay SE tax, you must file Form 1040 (with Schedule SE attached) even if you do not otherwise have to file a federal income tax return.

The following examples illustrate the use of the short and long forms of Schedule SE (Form 1040).

The following example shows how Susan J. Brown fills out Section A—Short Schedule SE.

Susan J. Brown is the sole proprietor of a dress shop, Milady Fashions. She received no wages and she does not own any other business. Her husband has no interest in her business. Her Schedule C (Form 1040) shows a net profit of $35,100 in 2003.

If Susan were the sole proprietor of more than one business, she would have combined the profits and losses from all of them and completed a single Schedule SE.

If, in addition to operating her dress shop, she had worked for wages and the total of her wages and her SE income was more than $87,000, she would have filled out Long Schedule SE.

Susan's husband has no interest in her business and does not pay SE tax on this income. If her husband was a partner in the business or had other income subject to SE tax, he would file a separate Schedule SE.

The following example illustrates how John Clarke fills out Section B—Long Schedule SE.

John Clarke is single. He is employed as a full-time history professor at a local university. His wages from this job were $80,600. John also gives lectures around the country on a freelance basis. His net profit from these lectures was $15,000, which he reported on Schedule C–EZ (Form 1040), (not shown).

His net profit from lecturing and his wages total more than $87,000, so he must fill out Long Schedule SE.

John only needs to complete Part I of Long Schedule SE because he is not using an optional method.

John's completed Long Schedule SE is shown later. The following table describes how John completes each line.

Table 8. Completing Long Schedule SE

Line	Description
1	John has no farm income, so he leaves line 1 blank.
2	John enters the net profit from his Schedule C–EZ, $15,000.
3	John has no farm income, so he enters the same amount on line 3, $15,000.
4a	John multiplies the $15,000 by 92.35% (.9235) to get his net earnings and enters $13,852.50.
4b	John did not elect an optional method, so he leaves this line blank.
4c	Line 4b is blank, so he enters the same amount he entered on line 4a, $13,852.50.
5a 5b	John had no church employee income. He leaves these lines blank.
6	Line 5b is blank, so John enters the same amount he entered on line 4c, $13,852.50.
8a	John enters his total wages, $80,600.
8b	This line does not apply to him, so John leaves it blank.
8c	Line 8b is blank, so he enters the same amount he entered on line 8a, $80,600.
9	He subtracts line 8c ($80,600) from line 7 and enters the result, $6,400.
10	John multiplies the smaller of line 6 ($13,852.50) or line 9 ($6,400) by 12.4% (.124) and enters the result, $793.60.
11	John multiplies line 6 ($13,852.50) by 2.9% (.029) and enters the result, $401.72.
12	John adds lines 10 and 11 and enters the total, $1,195.32, here and on line 55 of Form 1040 (not illustrated).
13	John multiples line 12 (his SE tax) by 50% (.5) and enters the result ($597.66) on: Line 13 of this schedule, and Line 28 of Form 1040. This is the SE tax he can deduct.

You can get help with unresolved tax issues, order free publications and forms, ask tax questions, and get more information from the IRS in several ways. By selecting the method that is best for you, you will have quick and easy access to tax help.

Contacting your Taxpayer Advocate.

If you have attempted to deal with an IRS problem unsuccessfully, you should contact your Taxpayer Advocate.

The Taxpayer Advocate independently represents your interests and concerns within the IRS by protecting your rights and resolving problems that have not been fixed through normal channels. While Taxpayer Advocates cannot change the tax law or make a technical tax decision, they can clear up problems that resulted from previous contacts and ensure that your case is given a complete and impartial review.

To contact your Taxpayer Advocate:

Call the Taxpayer Advocate toll free at
1–877–777–4778.
Call, write, or fax the Taxpayer Advocate office in your area.
Call 1–800–829–4059 if you are a
TTY/TDD user.
Visit the website at www.irs.gov/advocate.

For more information, see Publication 1546, The Taxpayer Advocate Service of the IRS.

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Asking tax questions. Call the IRS with your tax questions at 1–800–829–1040.
Solving problems. You can get face-to-face help solving tax problems every business day in IRS Taxpayer Assistance Centers. An employee can explain IRS letters, request adjustments to your account, or help you set up a payment plan. Call your local Taxpayer Assistance Center for an appointment. To find the number, go to www.irs.gov or look in the phone book under “United States Government, Internal Revenue Service.”
TTY/TDD equipment. If you have access to TTY/TDD equipment, call 1–800–829– 4059 to ask tax or account questions or to order forms and publications.
TeleTax topics. Call 1–800–829–4477 to listen to pre-recorded messages covering various tax topics.
Refund information. If you would like to check the status of your 2003 refund, call 1–800–829 4477 for automated refund information and follow the recorded instructions or call 1–800–829–1954. Be sure to wait at least 6 weeks from the date you filed your return (3 weeks if you filed electronically) and have your 2003 tax return available because you will need to know your filing status and the exact whole dollar amount of your refund.

Evaluating the quality of our telephone services. To ensure that IRS representatives give accurate, courteous, and professional answers, we use several methods to evaluate the quality of our telephone services. One method is for a second IRS representative to sometimes listen in on or record telephone calls. Another is to ask some callers to complete a short survey at the end of the call.

Mail. You can send your order for forms, instructions, and publications to the Distribution Center nearest to you and receive a response within 10 workdays after your request is received. Use the address that applies to your part of the country.

CD-ROM for tax products. You can order IRS Publication 1796, Federal Tax Products on CD-ROM, and obtain:

Buy the CD-ROM from National Technical Information Service (NTIS) on the Internet at www.irs.gov/cdorders for $22 (no handling fee) or call 1–877–233–6767 toll free to buy the CD-ROM for $22 (plus a $5 handling fee). The first release is available in early January and the final release is available in late February.

CD-ROM for small businesses. IRS Publication 3207, Small Business Resource Guide, is a must for every small business owner or any taxpayer about to start a business. This handy, interactive CD contains all the business tax forms, instructions and publications needed to successfully manage a business. In addition, the CD provides an abundance of other helpful information, such as how to prepare a business plan, finding financing for your business, and much more. The design of the CD makes finding information easy and quick and incorporates file formats and browsers that can be run on virtually any desktop or laptop computer.

It is available in early April. You can get a free copy by calling 1–800–829–3676 or by visiting the website at www.irs.gov/smallbiz.

Publication 533Main Contents

Publication 533
Main Contents