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Filing 1040 Ez

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Filing 1040 Ez

Filing 1040 ez 2. Filing 1040 ez   Accounting Periods and Methods Table of Contents Introduction Useful Items - You may want to see: Accounting Periods Accounting MethodsCash Method Accrual Method Combination Method Inventories Uniform Capitalization Rules Special Methods Change in Accounting Method Introduction You must figure your taxable income and file an income tax return for an annual accounting period called a tax year. Filing 1040 ez Also, you must consistently use an accounting method that clearly shows your income and expenses for the tax year. Filing 1040 ez Useful Items - You may want to see: Publication 538 Accounting Periods and Methods See chapter 12 for information about getting publications and forms. Filing 1040 ez Accounting Periods When preparing a statement of income and expenses (generally your income tax return), you must use your books and records for a specific interval of time called an accounting period. Filing 1040 ez The annual accounting period for your income tax return is called a tax year. Filing 1040 ez You can use one of the following tax years. Filing 1040 ez A calendar tax year. Filing 1040 ez A fiscal tax year. Filing 1040 ez Unless you have a required tax year, you adopt a tax year by filing your first income tax return using that tax year. Filing 1040 ez A required tax year is a tax year required under the Internal Revenue Code or the Income Tax Regulations. Filing 1040 ez Calendar tax year. Filing 1040 ez   A calendar tax year is 12 consecutive months beginning January 1 and ending December 31. Filing 1040 ez   You must adopt the calendar tax year if any of the following apply. Filing 1040 ez You do not keep books. Filing 1040 ez You have no annual accounting period. Filing 1040 ez Your present tax year does not qualify as a fiscal year. Filing 1040 ez Your use of the calendar tax year is required under the Internal Revenue Code or the Income Tax Regulations. Filing 1040 ez   If you filed your first income tax return using the calendar tax year and you later begin business as a sole proprietor, you must continue to use the calendar tax year unless you get IRS approval to change it or are otherwise allowed to change it without IRS approval. Filing 1040 ez For more information, see Change in tax year, later. Filing 1040 ez   If you adopt the calendar tax year, you must maintain your books and records and report your income and expenses for the period from January 1 through December 31 of each year. Filing 1040 ez Fiscal tax year. Filing 1040 ez   A fiscal tax year is 12 consecutive months ending on the last day of any month except December. Filing 1040 ez A 52-53-week tax year is a fiscal tax year that varies from 52 to 53 weeks but does not have to end on the last day of a month. Filing 1040 ez   If you adopt a fiscal tax year, you must maintain your books and records and report your income and expenses using the same tax year. Filing 1040 ez   For more information on a fiscal tax year, including a 52-53-week tax year, see Publication 538. Filing 1040 ez Change in tax year. Filing 1040 ez   Generally, you must file Form 1128, Application To Adopt, Change, or Retain a Tax Year, to request IRS approval to change your tax year. Filing 1040 ez See the Instructions for Form 1128 for exceptions. Filing 1040 ez If you qualify for an automatic approval request, a user fee is not required. Filing 1040 ez If you do not qualify for automatic approval, a ruling must be requested. Filing 1040 ez See the instructions for Form 1128 for information about user fees if you are requesting a ruling. Filing 1040 ez Accounting Methods An accounting method is a set of rules used to determine when and how income and expenses are reported. Filing 1040 ez Your accounting method includes not only the overall method of accounting you use, but also the accounting treatment you use for any material item. Filing 1040 ez You choose an accounting method for your business when you file your first income tax return that includes a Schedule C for the business. Filing 1040 ez After that, if you want to change your accounting method, you must generally get IRS approval. Filing 1040 ez See Change in Accounting Method, later. Filing 1040 ez Kinds of methods. Filing 1040 ez   Generally, you can use any of the following accounting methods. Filing 1040 ez Cash method. Filing 1040 ez An accrual method. Filing 1040 ez Special methods of accounting for certain items of income and expenses. Filing 1040 ez Combination method using elements of two or more of the above. Filing 1040 ez You must use the same accounting method to figure your taxable income and to keep your books. Filing 1040 ez Also, you must use an accounting method that clearly shows your income. Filing 1040 ez Business and personal items. Filing 1040 ez   You can account for business and personal items under different accounting methods. Filing 1040 ez For example, you can figure your business income under an accrual method, even if you use the cash method to figure personal items. Filing 1040 ez Two or more businesses. Filing 1040 ez   If you have two or more separate and distinct businesses, you can use a different accounting method for each if the method clearly reflects the income of each business. Filing 1040 ez They are separate and distinct only if you maintain complete and separate books and records for each business. Filing 1040 ez Cash Method Most individuals and many sole proprietors with no inventory use the cash method because they find it easier to keep cash method records. Filing 1040 ez However, if an inventory is necessary to account for your income, you must generally use an accrual method of accounting for sales and purchases. Filing 1040 ez For more information, see Inventories, later. Filing 1040 ez Income Under the cash method, include in your gross income all items of income you actually or constructively receive during your tax year. Filing 1040 ez If you receive property or services, you must include their fair market value in income. Filing 1040 ez Example. Filing 1040 ez On December 30, 2012, Mrs. Filing 1040 ez Sycamore sent you a check for interior decorating services you provided to her. Filing 1040 ez You received the check on January 2, 2013. Filing 1040 ez You must include the amount of the check in income for 2013. Filing 1040 ez Constructive receipt. Filing 1040 ez   You have constructive receipt of income when an amount is credited to your account or made available to you without restriction. Filing 1040 ez You do not need to have possession of it. Filing 1040 ez If you authorize someone to be your agent and receive income for you, you are treated as having received it when your agent received it. Filing 1040 ez Example. Filing 1040 ez Interest is credited to your bank account in December 2013. Filing 1040 ez You do not withdraw it or enter it into your passbook until 2014. Filing 1040 ez You must include it in your gross income for 2013. Filing 1040 ez Delaying receipt of income. Filing 1040 ez   You cannot hold checks or postpone taking possession of similar property from one tax year to another to avoid paying tax on the income. Filing 1040 ez You must report the income in the year the property is received or made available to you without restriction. Filing 1040 ez Example. Filing 1040 ez Frances Jones, a service contractor, was entitled to receive a $10,000 payment on a contract in December 2013. Filing 1040 ez She was told in December that her payment was available. Filing 1040 ez At her request, she was not paid until January 2014. Filing 1040 ez She must include this payment in her 2013 income because it was constructively received in 2013. Filing 1040 ez Checks. Filing 1040 ez   Receipt of a valid check by the end of the tax year is constructive receipt of income in that year, even if you cannot cash or deposit the check until the following year. Filing 1040 ez Example. Filing 1040 ez Dr. Filing 1040 ez Redd received a check for $500 on December 31, 2013, from a patient. Filing 1040 ez She could not deposit the check in her business account until January 2, 2014. Filing 1040 ez She must include this fee in her income for 2013. Filing 1040 ez Debts paid by another person or canceled. Filing 1040 ez   If your debts are paid by another person or are canceled by your creditors, you may have to report part or all of this debt relief as income. Filing 1040 ez If you receive income in this way, you constructively receive the income when the debt is canceled or paid. Filing 1040 ez For more information, see Canceled Debt under Kinds of Income in chapter 5. Filing 1040 ez Repayment of income. Filing 1040 ez   If you include an amount in income and in a later year you have to repay all or part of it, you can usually deduct the repayment in the year in which you make it. Filing 1040 ez If the amount you repay is over $3,000, a special rule applies. Filing 1040 ez For details about the special rule, see Repayments in chapter 11 of Publication 535, Business Expenses. Filing 1040 ez Expenses Under the cash method, you generally deduct expenses in the tax year in which you actually pay them. Filing 1040 ez This includes business expenses for which you contest liability. Filing 1040 ez However, you may not be able to deduct an expense paid in advance or you may be required to capitalize certain costs, as explained later under Uniform Capitalization Rules. Filing 1040 ez Expenses paid in advance. Filing 1040 ez   You can deduct an expense you pay in advance only in the year to which it applies. Filing 1040 ez Example. Filing 1040 ez You are a calendar year taxpayer and you pay $1,000 in 2013 for a business insurance policy effective for one year, beginning July 1. Filing 1040 ez You can deduct $500 in 2013 and $500 in 2014. Filing 1040 ez Accrual Method Under an accrual method of accounting, you generally report income in the year earned and deduct or capitalize expenses in the year incurred. Filing 1040 ez The purpose of an accrual method of accounting is to match income and expenses in the correct year. Filing 1040 ez Income—General Rule Under an accrual method, you generally include an amount in your gross income for the tax year in which all events that fix your right to receive the income have occurred and you can determine the amount with reasonable accuracy. Filing 1040 ez Example. Filing 1040 ez You are a calendar year accrual method taxpayer. Filing 1040 ez You sold a computer on December 28, 2013. Filing 1040 ez You billed the customer in the first week of January 2014, but you did not receive payment until February 2014. Filing 1040 ez You must include the amount received for the computer in your 2013 income. Filing 1040 ez Income—Special Rules The following are special rules that apply to advance payments, estimating income, and changing a payment schedule for services. Filing 1040 ez Estimated income. Filing 1040 ez   If you include a reasonably estimated amount in gross income, and later determine the exact amount is different, take the difference into account in the tax year in which you make the determination. Filing 1040 ez Change in payment schedule for services. Filing 1040 ez   If you perform services for a basic rate specified in a contract, you must accrue the income at the basic rate, even if you agree to receive payments at a lower rate until you complete the services and then receive the difference. Filing 1040 ez Advance payments for services. Filing 1040 ez   Generally, you report an advance payment for services to be performed in a later tax year as income in the year you receive the payment. Filing 1040 ez However, if you receive an advance payment for services you agree to perform by the end of the next tax year, you can elect to postpone including the advance payment in income until the next tax year. Filing 1040 ez However, you cannot postpone including any payment beyond that tax year. Filing 1040 ez   For more information, see Advance Payment for Services under Accrual Method in Publication 538. Filing 1040 ez That publication also explains special rules for reporting the following types of income. Filing 1040 ez Advance payments for service agreements. Filing 1040 ez Prepaid rent. Filing 1040 ez Advance payments for sales. Filing 1040 ez   Special rules apply to including income from advance payments on agreements for future sales or other dispositions of goods you hold primarily for sale to your customers in the ordinary course of your business. Filing 1040 ez If the advance payments are for contracts involving both the sale and service of goods, it may be necessary to treat them as two agreements. Filing 1040 ez An agreement includes a gift certificate that can be redeemed for goods. Filing 1040 ez Treat amounts that are due and payable as amounts you received. Filing 1040 ez   You generally include an advance payment in income for the tax year in which you receive it. Filing 1040 ez However, you can use an alternative method. Filing 1040 ez For information about the alternative method, see Publication 538. Filing 1040 ez Expenses Under an accrual method of accounting, you generally deduct or capitalize a business expense when both the following apply. Filing 1040 ez The all-events test has been met. Filing 1040 ez The test has been met when: All events have occurred that fix the fact of liability, and The liability can be determined with reasonable accuracy. Filing 1040 ez Economic performance has occurred. Filing 1040 ez Economic performance. Filing 1040 ez   You generally cannot deduct or capitalize a business expense until economic performance occurs. Filing 1040 ez If your expense is for property or services provided to you, or for your use of property, economic performance occurs as the property or services are provided or as the property is used. Filing 1040 ez If your expense is for property or services you provide to others, economic performance occurs as you provide the property or services. Filing 1040 ez An exception allows certain recurring items to be treated as incurred during a tax year even though economic performance has not occurred. Filing 1040 ez For more information on economic performance, see Economic Performance under Accrual Method in Publication 538. Filing 1040 ez Example. Filing 1040 ez You are a calendar year taxpayer and use an accrual method of accounting. Filing 1040 ez You buy office supplies in December 2013. Filing 1040 ez You receive the supplies and the bill in December, but you pay the bill in January 2014. Filing 1040 ez You can deduct the expense in 2013 because all events that fix the fact of liability have occurred, the amount of the liability could be reasonably determined, and economic performance occurred in that year. Filing 1040 ez Your office supplies may qualify as a recurring expense. Filing 1040 ez In that case, you can deduct them in 2013 even if the supplies are not delivered until 2014 (when economic performance occurs). Filing 1040 ez Keeping inventories. Filing 1040 ez   When the production, purchase, or sale of merchandise is an income-producing factor in your business, you must generally take inventories into account at the beginning and the end of your tax year. Filing 1040 ez If you must account for an inventory, you must generally use an accrual method of accounting for your purchases and sales. Filing 1040 ez For more information, see Inventories , later. Filing 1040 ez Special rule for related persons. Filing 1040 ez   You cannot deduct business expenses and interest owed to a related person who uses the cash method of accounting until you make the payment and the corresponding amount is includible in the related person's gross income. Filing 1040 ez Determine the relationship, for this rule, as of the end of the tax year for which the expense or interest would otherwise be deductible. Filing 1040 ez If a deduction is not allowed under this rule, the rule will continue to apply even if your relationship with the person ends before the expense or interest is includible in the gross income of that person. Filing 1040 ez   Related persons include members of your immediate family, including only brothers and sisters (either whole or half), your spouse, ancestors, and lineal descendants. Filing 1040 ez For a list of other related persons, see section 267 of the Internal Revenue Code. Filing 1040 ez Combination Method You can generally use any combination of cash, accrual, and special methods of accounting if the combination clearly shows your income and expenses and you use it consistently. Filing 1040 ez However, the following restrictions apply. Filing 1040 ez If an inventory is necessary to account for your income, you must generally use an accrual method for purchases and sales. Filing 1040 ez (See, however, Inventories, later. Filing 1040 ez ) You can use the cash method for all other items of income and expenses. Filing 1040 ez If you use the cash method for figuring your income, you must use the cash method for reporting your expenses. Filing 1040 ez If you use an accrual method for reporting your expenses, you must use an accrual method for figuring your income. Filing 1040 ez If you use a combination method that includes the cash method, treat that combination method as the cash method. Filing 1040 ez Inventories Generally, if you produce, purchase, or sell merchandise in your business, you must keep an inventory and use the accrual method for purchases and sales of merchandise. Filing 1040 ez However, the following taxpayers can use the cash method of accounting even if they produce, purchase, or sell merchandise. Filing 1040 ez These taxpayers can also account for inventoriable items as materials and supplies that are not incidental (discussed later). Filing 1040 ez A qualifying taxpayer under Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Filing 1040 ez A qualifying small business taxpayer under Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Filing 1040 ez Qualifying taxpayer. Filing 1040 ez   You are a qualifying taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 17, 1998, is $1 million or less. Filing 1040 ez (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing by 3. Filing 1040 ez ) Your business is not a tax shelter, as defined under section 448(d)(3) of the Internal Revenue Code. Filing 1040 ez Qualifying small business taxpayer. Filing 1040 ez   You are a qualifying small business taxpayer if: Your average annual gross receipts for each prior tax year ending on or after December 31, 2000, is more than $1 million but not more than $10 million. Filing 1040 ez (Your average annual gross receipts for a tax year is figured by adding the gross receipts for that tax year and the 2 preceding tax years and dividing the total by 3. Filing 1040 ez ) You are not prohibited from using the cash method under section 448 of the Internal Revenue Code. Filing 1040 ez Your principal business activity is an eligible business (described in Publication 538 and Revenue Procedure 2002-28). Filing 1040 ez Business not owned or not in existence for 3 years. Filing 1040 ez   If you did not own your business for all of the 3-tax-year period used in figuring your average annual gross receipts, include the period of any predecessor. Filing 1040 ez If your business has not been in existence for the 3-tax-year period, base your average on the period it has existed including any short tax years, annualizing the short tax year's gross receipts. Filing 1040 ez Materials and supplies that are not incidental. Filing 1040 ez   If you account for inventoriable items as materials and supplies that are not incidental, you will deduct the cost of the items you would otherwise include in inventory in the year you sell the items, or the year you pay for them, whichever is later. Filing 1040 ez If you are a producer, you can use any reasonable method to estimate the raw material in your work in process and finished goods on hand at the end of the year to determine the raw material used to produce finished goods that were sold during the year. Filing 1040 ez Changing accounting method. Filing 1040 ez   If you are a qualifying taxpayer or qualifying small business taxpayer and want to change to the cash method or to account for inventoriable items as non-incidental materials and supplies, you must file Form 3115, Application for Change in Accounting Method. Filing 1040 ez See Change in Accounting Method, later. Filing 1040 ez More information. Filing 1040 ez    For more information about the qualifying taxpayer exception, see Revenue Procedure 2001-10 in Internal Revenue Bulletin 2001-2. Filing 1040 ez For more information about the qualifying small business taxpayer exception, see Revenue Procedure 2002-28 in Internal Revenue Bulletin 2002-18. Filing 1040 ez Items included in inventory. Filing 1040 ez   If you are required to account for inventories, include the following items when accounting for your inventory. Filing 1040 ez Merchandise or stock in trade. Filing 1040 ez Raw materials. Filing 1040 ez Work in process. Filing 1040 ez Finished products. Filing 1040 ez Supplies that physically become a part of the item intended for sale. Filing 1040 ez Valuing inventory. Filing 1040 ez   You must value your inventory at the beginning and end of each tax year to determine your cost of goods sold (Schedule C, line 42). Filing 1040 ez To determine the value of your inventory, you need a method for identifying the items in your inventory and a method for valuing these items. Filing 1040 ez   Inventory valuation rules cannot be the same for all kinds of businesses. Filing 1040 ez The method you use to value your inventory must conform to generally accepted accounting principles for similar businesses and must clearly reflect income. Filing 1040 ez Your inventory practices must be consistent from year to year. Filing 1040 ez More information. Filing 1040 ez   For more information about inventories, see Publication 538. Filing 1040 ez Uniform Capitalization Rules Under the uniform capitalization rules, you must capitalize the direct costs and part of the indirect costs for production or resale activities. Filing 1040 ez Include these costs in the basis of property you produce or acquire for resale, rather than claiming them as a current deduction. Filing 1040 ez You recover the costs through depreciation, amortization, or cost of goods sold when you use, sell, or otherwise dispose of the property. Filing 1040 ez Activities subject to the uniform capitalization rules. Filing 1040 ez   You may be subject to the uniform capitalization rules if you do any of the following, unless the property is produced for your use other than in a business or an activity carried on for profit. Filing 1040 ez Produce real or tangible personal property. Filing 1040 ez For this purpose, tangible personal property includes a film, sound recording, video tape, book, or similar property. Filing 1040 ez Acquire property for resale. Filing 1040 ez Exceptions. Filing 1040 ez   These rules do not apply to the following property. Filing 1040 ez Personal property you acquire for resale if your average annual gross receipts are $10 million or less. Filing 1040 ez Property you produce if you meet either of the following conditions. Filing 1040 ez Your indirect costs of producing the property are $200,000 or less. Filing 1040 ez You use the cash method of accounting and do not account for inventories. Filing 1040 ez For more information, see Inventories, earlier. Filing 1040 ez Special Methods There are special methods of accounting for certain items of income or expense. Filing 1040 ez These include the following. Filing 1040 ez Amortization, discussed in chapter 8 of Publication 535, Business Expenses. Filing 1040 ez Bad debts, discussed in chapter 10 of Publication 535. Filing 1040 ez Depletion, discussed in chapter 9 of Publication 535. Filing 1040 ez Depreciation, discussed in Publication 946, How To Depreciate Property. Filing 1040 ez Installment sales, discussed in Publication 537, Installment Sales. Filing 1040 ez Change in Accounting Method Once you have set up your accounting method, you must generally get IRS approval before you can change to another method. Filing 1040 ez A change in your accounting method includes a change in: Your overall method, such as from cash to an accrual method, and Your treatment of any material item. Filing 1040 ez To get approval, you must file Form 3115, Application for Change in Accounting Method. Filing 1040 ez You can get IRS approval to change an accounting method under either the automatic change procedures or the advance consent request procedures. Filing 1040 ez You may have to pay a user fee. Filing 1040 ez For more information, see the form instructions. Filing 1040 ez Automatic change procedures. Filing 1040 ez   Certain taxpayers can presume to have IRS approval to change their method of accounting. Filing 1040 ez The approval is granted for the tax year for which the taxpayer requests a change (year of change), if the taxpayer complies with the provisions of the automatic change procedures. Filing 1040 ez No user fee is required for an application filed under an automatic change procedure generally covered in Revenue Procedure 2002-9. Filing 1040 ez   Generally, you must use Form 3115 to request an automatic change. Filing 1040 ez For more information, see the Instructions for Form 3115. Filing 1040 ez Prev  Up  Next   Home   More Online Publications
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Historical Highlights of the IRS

1862 - President Lincoln signed into law a revenue-raising measure to help pay for Civil War expenses. The measure created a Commissioner of Internal Revenue and the nation's first income tax. It levied a 3 percent tax on incomes between $600 and $10,000 and a 5 percent tax on incomes of more than $10,000.

1867 - Heeding public opposition to the income tax, Congress cut the tax rate. From 1868 until 1913, 90 percent of all revenue came from taxes on liquor, beer, wine and tobacco.

1872 - Income tax repealed.

1894 - The Wilson Tariff Act revived the income tax and an income tax division within the Bureau of Internal Revenue was created.

1895 - Supreme Court ruled the new income tax unconstitutional on the grounds that it was a direct tax and not apportioned among the states on the basis of population. The income tax division was disbanded.

1909 - President Taft recommended Congress propose a constitutional amendment that would give the government the power to tax incomes without apportioning the burden among the states in line with population. Congress also levied a 1 percent tax on net corporate incomes of more than $5,000.

1913 - As the threat of war loomed, Wyoming became the 36th and last state needed to ratify the 16th Amendment. The amendment stated, "Congress shall have the power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several states, and without regard to any census or enumeration." Later, Congress adopted a 1 percent tax on net personal income of more than $3,000 with a surtax of 6 percent on incomes of more than $500,000. It also repealed the 1909 corporate income tax. The first Form 1040 was introduced.

1918 - The Revenue Act of 1918 raised even greater sums for the World War I effort. It codified all existing tax laws and imposed a progressive income-tax rate structure of up to 77 percent.

1919 - The states ratified the 18th Amendment, barring the manufacture, sale or transport of intoxicating beverages. Congress passed the Volstead Act, which gave the Commissioner of Internal Revenue the primary responsibility for enforcement of Prohibition. Eleven years later, the Department of Justice assumed primary prohibition enforcement duties.

1931 - The IRS Intelligence Unit used an undercover agent to gather evidence against gangster Al Capone. Capone was convicted of tax evasion and sentenced to 11 years.

1933 - Prohibition repealed. IRS again assumed responsibility for alcohol taxation the following year and for administering the National Firearms Act. Later, tobacco tax enforcement was added.

1942 - The Revenue Act of 1942, hailed by President Roosevelt as "the greatest tax bill in American history," passed Congress. It increased taxes and the number of Americans subject to the income tax. It also created deductions for medical and investment expenses.

1943 - Congress passed the Current Tax Payment Act, which required employers to withhold taxes from employees' wages and remit them quarterly.

1944 - Congress passed the Individual Income Tax Act, which created the standard deductions on Form 1040.

1952 - President Truman proposed his Reorganization Plan No. 1, which replaced the patronage system at the IRS with a career civil service system. It also decentralized service to taxpayers and sought to restore public confidence in the agency.

1953 - President Eisenhower endorsed Truman's reorganization plan and changed the name of the agency from the Bureau of Internal Revenue to the Internal Revenue Service.

1954 - The filing deadline for individual tax returns changed from March 15 to April 15.

1961 - The Computer Age began at IRS with the dedication of the National Computer Center at Martinsburg, W.Va.

1965 - IRS instituted its first toll-free telephone site.

1972 - The Alcohol, Tobacco and Firearms Division separated from the IRS to become the independent Bureau of Alcohol, Tobacco and Firearms.

1974 - Congress passed the Employee Retirement and Income Security Act, which gave regulatory responsibilities for employee benefit plans to the IRS.

1986 - Limited electronic filing began. President Reagan signed the Tax Reform Act, the most significant piece of tax legislation in 30 years. It contained 300 provisions and took three years to implement. The Act codified the federal tax laws for the third time since the Revenue Act of 1918.

1992 - Taxpayers who owed money were allowed to file returns electronically.

1998 - Congress passed the IRS Restructuring and Reform Act, which expanded taxpayer rights and called for reorganizing the agency into four operating divisions aligned according to taxpayer needs.

2000 - IRS enacted reforms, ending its geographic-based structure and instituting four major operating divisions: Wage and Investment, Small Business/Self-Employed, Large and Mid-Size Business and Tax Exempt and Government Entities. It was the most sweeping change at the IRS since the 1953 reorganization.

2001 - IRS administered a mid-year tax refund program to provide advance payments of a tax rate reduction.

2003 - IRS administered another mid-year refund program, this time providing an advance payment of an increase in the Child Tax Credit. Electronic filing reached a new high - 52.9 million tax returns, more than 40 percent of all individual returns.

Page Last Reviewed or Updated: 12-Feb-2014

The Filing 1040 Ez

Filing 1040 ez 12. Filing 1040 ez   Self-Employment Tax Table of Contents What's New for 2013 What's New for 2014 Introduction Topics - This chapter discusses: Useful Items - You may want to see: Why Pay Self-Employment Tax? How To Pay Self-Employment TaxReplacing a lost social security card. Filing 1040 ez Name change. Filing 1040 ez Penalty for underpayment of estimated tax. Filing 1040 ez Who Must Pay Self-Employment Tax?Limited partner. Filing 1040 ez Community property. Filing 1040 ez Figuring Self-Employment EarningsLandlord Participation in Farming Methods for Figuring Net EarningsRegular Method Farm Optional Method Nonfarm Optional Method Using Both Optional Methods Reporting Self-Employment Tax What's New for 2013 Tax rates. Filing 1040 ez  For tax years beginning in 2013, the social security part of the self-employment tax increases from 10. Filing 1040 ez 4% to 12. Filing 1040 ez 4%. Filing 1040 ez The Medicare part of the tax remains at 2. Filing 1040 ez 9%. Filing 1040 ez As a result, the self-employment tax is increased from 13. Filing 1040 ez 3% to 15. Filing 1040 ez 3%. Filing 1040 ez Additional Medicare Tax. Filing 1040 ez . Filing 1040 ez  For tax years beginning in 2013, a 0. Filing 1040 ez 9% Additional Medicare Tax applies to your Medicare wages, Railroad Retirement Tax Act (RRTA) compensation, and self-employment income above a threshold amount. Filing 1040 ez Use Form 8959, Additional Medicare Tax, to figure this tax. Filing 1040 ez For more information, see the Instructions for Form 8959. Filing 1040 ez Maximum net earnings. Filing 1040 ez  The maximum net self-employment earnings subject to the social security part (12. Filing 1040 ez 4%) of the self-employment tax increased to $113,700 for 2013. Filing 1040 ez There is no maximum limit on earnings subject to the Medicare part (2. Filing 1040 ez 9%). Filing 1040 ez What's New for 2014 Maximum net earnings. Filing 1040 ez  The maximum net self-employment earnings subject to the social security part of the self-employment tax for 2014 will be discussed in the 2013 Publication 334. Filing 1040 ez Introduction Self-employment tax (SE tax) is a social security and Medicare tax primarily for individuals who work for themselves. Filing 1040 ez It is similar to the social security and Medicare taxes withheld from the pay of most wage earners. Filing 1040 ez You usually have to pay SE tax if you are self-employed. Filing 1040 ez You are usually self-employed if you operate your own farm on land you either own or rent. Filing 1040 ez You have to figure SE tax on Schedule SE (Form 1040). Filing 1040 ez Farmers who have employees may have to pay the employer's share of social security and Medicare taxes, as well. Filing 1040 ez See chapter 13 for information on employment taxes. Filing 1040 ez Self-employment tax rate. Filing 1040 ez   For tax years beginning in 2013, the self-employment tax rate is 15. Filing 1040 ez 3%. Filing 1040 ez The rate consists of two parts: 12. Filing 1040 ez 4% for social security (old-age, survivors, and disability insurance) and 2. Filing 1040 ez 9% for Medicare (hospital insurance). Filing 1040 ez Topics - This chapter discusses: Why pay self-employment tax How to pay self-employment tax Who must pay self-employment tax Figuring self-employment earnings Landlord participation in farming Methods for figuring net earnings Reporting self-employment tax Useful Items - You may want to see: Publication 541 Partnerships Form (and Instructions) 1040 U. Filing 1040 ez S. Filing 1040 ez Individual Income Tax Return Sch F (Form 1040) Profit or Loss From Farming Sch SE (Form 1040) Self-Employment Tax 1065 U. Filing 1040 ez S. Filing 1040 ez Return of Partnership Income Sch K-1 (Form 1065) Partner's Share of Income, Deductions, Credits, etc. Filing 1040 ez See chapter 16 for information about getting publications and forms. Filing 1040 ez Why Pay Self-Employment Tax? Social security benefits are available to self-employed persons just as they are to wage earners. Filing 1040 ez Your payments of SE tax contribute to your coverage under the social security system. Filing 1040 ez Social security coverage provides you with retirement benefits, disability benefits, survivor benefits, and hospital insurance (Medicare) benefits. Filing 1040 ez How to become insured under social security. Filing 1040 ez   You must be insured under the social security system before you begin receiving social security benefits. Filing 1040 ez You are insured if you have the required number of credits (also called quarters of coverage). Filing 1040 ez Earning credits in 2013. Filing 1040 ez   You can earn a maximum of four credits per year. Filing 1040 ez For 2013, you earn one credit for each $1,160 of combined wages and self-employment earnings subject to social security tax. Filing 1040 ez You need $4,640 ($1,160 × 4) of combined wages and self-employment earnings subject to social security tax to earn four credits in 2013. Filing 1040 ez It does not matter whether the income is earned in 1 quarter or is spread over 2 or more quarters. Filing 1040 ez 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 or visit the SSA website at www. Filing 1040 ez socialsecurity. Filing 1040 ez gov. Filing 1040 ez Making false statements to get or to increase social security benefits may subject you to penalties. Filing 1040 ez The Social Security Administration (SSA) time limit for posting self-employment earnings. Filing 1040 ez   Generally, the SSA will give you credit only for self-employment earnings reported on a tax return filed within 3 years, 3 months, and 15 days after the tax year you earned the income. Filing 1040 ez    If you file your tax return or report a change in your self-employment earnings after the SSA time limit for posting self-employment earnings, the SSA may change its records, but only to remove or reduce the amount. Filing 1040 ez The SSA will not change its records to increase your self-employment earnings after the SSA time limit listed above. Filing 1040 ez How To Pay Self-Employment Tax To pay SE tax, you must have a social security number (SSN) or an individual taxpayer identification number (ITIN). Filing 1040 ez This section explains how to: Obtain an SSN or ITIN, and Pay your SE tax using estimated tax. Filing 1040 ez An ITIN does not entitle you to social security benefits. Filing 1040 ez Obtaining an ITIN does not change your immigration or employment status under U. Filing 1040 ez S. Filing 1040 ez law. Filing 1040 ez Obtaining a social security number. Filing 1040 ez   If you have never had an SSN, apply for one using Form SS-5, Application for a Social Security Card. Filing 1040 ez The application is also available in Spanish. Filing 1040 ez You can get this form at any Social Security office or by calling 1-800-772-1213. Filing 1040 ez    You can also download Form SS-5 from the Social Security Administration website at  www. Filing 1040 ez socialsecurity. Filing 1040 ez gov. Filing 1040 ez   If you have a social security number from the time you were an employee, you must use that number. Filing 1040 ez Do not apply for a new one. Filing 1040 ez Replacing a lost social security card. Filing 1040 ez   If you have a number but lost your card, file Form SS-5. Filing 1040 ez You will get a new card showing your original number, not a new number. Filing 1040 ez Name change. Filing 1040 ez   If your name has changed since you received your social security card, complete Form SS-5 to report a name change. Filing 1040 ez Obtaining an individual taxpayer identification number. Filing 1040 ez   The IRS will issue you an ITIN, for tax use only, if you are a nonresident or resident alien and you do not have, and are not eligible to get, an SSN. Filing 1040 ez To apply for an ITIN, file Form W-7, Application for IRS Individual Taxpayer Identification Number. Filing 1040 ez You can get this form by calling 1-800-829-3676. Filing 1040 ez For more information on ITINs, see Publication 1915, Understanding Your IRS Individual Taxpayer Identification Number. Filing 1040 ez Form W-7 and Publication 1915 are also available in Spanish. Filing 1040 ez    You can also download Form W-7 from the IRS website at IRS. Filing 1040 ez gov. Filing 1040 ez Paying estimated tax. Filing 1040 ez   Estimated tax is the method used to pay tax (including SE tax) on income not subject to withholding. Filing 1040 ez 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. Filing 1040 ez Use Form 1040-ES, Estimated Tax for Individuals, to figure and pay the tax. Filing 1040 ez   However, if at least two-thirds of your gross income for 2013 or 2014 was from farming and you file your 2014 Form 1040 and pay all the tax due by March 2, 2015, you do not have to pay any estimated tax. Filing 1040 ez For more information about estimated tax for farmers, see chapter 15. Filing 1040 ez Penalty for underpayment of estimated tax. Filing 1040 ez   You may have to pay a penalty if you do not pay enough estimated tax by its due date. Filing 1040 ez Who Must Pay Self-Employment Tax? You must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Filing 1040 ez The SE tax rules apply no matter how old you are and even if you are already receiving social security or Medicare benefits. Filing 1040 ez Aliens. Filing 1040 ez   Generally, resident aliens must pay self-employment tax under the same rules that apply to U. Filing 1040 ez S. Filing 1040 ez citizens. Filing 1040 ez Nonresident aliens are not subject to self-employment tax. Filing 1040 ez However, residents of the Virgin Islands, Puerto Rico, Guam, the Commonwealth of the Northern Mariana Islands, or American Samoa are subject to self-employment tax, as they are considered U. Filing 1040 ez S. Filing 1040 ez residents for self-employment tax purposes. Filing 1040 ez For more information on aliens, see Publication 519, U. Filing 1040 ez S. Filing 1040 ez Tax Guide for Aliens. Filing 1040 ez Are you self-employed?   You are self-employed if you carry on a trade or business (such as running a farm) as a sole proprietor, an independent contractor, a member of a partnership, or are otherwise in business for yourself. Filing 1040 ez A trade or business is generally an activity carried on for a livelihood or in good faith to make a profit. Filing 1040 ez Share farmer. Filing 1040 ez   You are a self-employed farmer under an income-sharing arrangement if both the following apply. Filing 1040 ez You produce a crop or raise livestock on land belonging to another person. Filing 1040 ez Your share of the crop or livestock, or the proceeds from their sale, depends on the amount produced. Filing 1040 ez Your net farm profit or loss from the income-sharing arrangement is reported on Schedule F (Form 1040) and included in your self-employment earnings. Filing 1040 ez   If you produce a crop or livestock on land belonging to another person and are to receive a specified rate of pay, a fixed sum of money, or a fixed quantity of the crop or livestock, and not a share of the crop or livestock or their proceeds, you may be either self-employed or an employee of the landowner. Filing 1040 ez This will depend on whether the landowner has the right to direct or control your performance of services. Filing 1040 ez Example. Filing 1040 ez A share farmer produces a crop on land owned by another person on a 50-50 crop-share basis. Filing 1040 ez Under the terms of their agreement, the share farmer furnishes the labor and half the cost of seed and fertilizer. Filing 1040 ez The landowner furnishes the machinery and equipment used to produce and harvest the crop, and half the cost of seed and fertilizer. Filing 1040 ez The share farmer is provided a house in which to live. Filing 1040 ez The landowner and the share farmer decide on a cropping plan. Filing 1040 ez The share farmer is a self-employed farmer for purposes of the agreement to produce the crops, and the share farmer's part of the profit or loss from the crops is reported on Schedule F (Form 1040) and included in self-employment earnings. Filing 1040 ez The tax treatment of the landowner is discussed later under Landlord Participation in Farming. Filing 1040 ez Contract farming. Filing 1040 ez   Under typical contract farming arrangements, the grower receives a fixed payment per unit of crops or finished livestock delivered to the processor or packing company. Filing 1040 ez Since the grower typically furnishes labor and bears some production risk, the payments are reported on Schedule F and are therefore subject to self-employment tax. Filing 1040 ez 4-H Club or FFA project. Filing 1040 ez   If an individual participates in a 4-H Club or Future Farmers of America (FFA) project, any net income received from sales or prizes related to the project may be subject to income tax. Filing 1040 ez Report the net income as “Other income” on line 21 of Form 1040. Filing 1040 ez If necessary, attach a statement showing the gross income and expenses. Filing 1040 ez The net income may not be subject to SE tax if the project is primarily for educational purposes and not for profit, and is completed by the individual under the rules and economic restrictions of the sponsoring 4-H or FFA organization. Filing 1040 ez Such a project is generally not considered a trade or business. Filing 1040 ez Partners in a partnership. Filing 1040 ez   Generally, you are self-employed if you are a member of a partnership that carries on a trade or business. Filing 1040 ez Limited partner. Filing 1040 ez   If you are a limited partner, your partnership income is generally not subject to SE tax. Filing 1040 ez However, guaranteed payments you receive for services you perform for the partnership are subject to SE tax and should be reported to you in box 14 of your Schedule K-1 (Form 1065). Filing 1040 ez Business Owned and Operated by Spouses. Filing 1040 ez   If you and your spouse jointly own and operate a farm as an unincorporated business and share in the profits and losses, you are partners in a partnership whether or not you have a formal partnership agreement. Filing 1040 ez You must file Form 1065, instead of Schedule F, unless you make a joint election to be treated as a qualified joint venture. Filing 1040 ez Making this election will allow you to avoid the complexity of Form 1065 but still give each spouse credit for social security earnings on which retirement benefits are based. Filing 1040 ez Qualified joint venture. Filing 1040 ez   If you and your spouse each materially participate as the only members of a jointly owned and operated farm, and you file a joint tax return for the tax year, you can make a joint election to be treated as a qualified joint venture instead of a partnership for the tax year. Filing 1040 ez For an explanation of “material participation,” see the instructions for Schedule C, line G, and the instructions for Schedule F, line E. Filing 1040 ez   To make this election, you must divide all items of income, gain, loss, deduction, and credit attributable to the business between you and your spouse in accordance with your respective interests in the venture. Filing 1040 ez Each of you must file a separate Schedule F and a separate Schedule SE. Filing 1040 ez For more information, see Qualified Joint Venture in the Instructions for Schedule SE (Form 1040). Filing 1040 ez Spouse employee. Filing 1040 ez   If your spouse is your employee, not your partner, you must withhold and pay social security and Medicare taxes for him or her. Filing 1040 ez For more information about employment taxes, see chapter 13. Filing 1040 ez Community property. Filing 1040 ez   If you are a partner and your distributive share of any income or loss from a trade or business carried on by the partnership is community property, treat your share as your self-employment earnings. Filing 1040 ez Do not treat any of your share as self-employment earnings of your spouse. Filing 1040 ez Figuring Self-Employment Earnings Farmer. Filing 1040 ez   If you are self-employed as a farmer, use Schedule F (Form 1040) to figure your self-employment earnings. Filing 1040 ez Partnership income or loss. Filing 1040 ez   If you are a member of a partnership that carries on a trade or business, the partnership should report your self-employment earnings in box 14, code A, of your Schedule K-1 (Form 1065). Filing 1040 ez Box 14 of Schedule K-1 may also provide amounts for gross farming or fishing income (code B) and gross nonfarm income (code C). Filing 1040 ez Use these amounts if you use the farm or nonfarm optional method to figure net earnings from self-employment (see Methods for Figuring Net Earnings , later). Filing 1040 ez   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. Filing 1040 ez   If the amount reported is a loss, include only the deductible amount when you figure your total self-employment earnings. Filing 1040 ez   For more information, see the Partner's Instructions for Schedule K-1 (Form 1065). Filing 1040 ez   For general information on partnerships, see Publication 541. Filing 1040 ez More than one business. Filing 1040 ez   If you have self-employment earnings from more than one trade, business, or profession, you generally must combine the net profit or loss from each to determine your total self-employment earnings. Filing 1040 ez A loss from one business reduces your profit from another business. Filing 1040 ez However, do not combine earnings from farm and nonfarm businesses if you are using one of the optional methods (discussed later) to figure net earnings. Filing 1040 ez Community property. Filing 1040 ez   If any of the income from a farm or business, other than a partnership, is community property under state law, it is included in the self-employment earnings of the spouse carrying on the trade or business. Filing 1040 ez Lost income payments. Filing 1040 ez   Lost income payments received from insurance or other sources for reducing or stopping farming activities are included in self-employment earnings. Filing 1040 ez These include USDA payments to compensate for lost income resulting from reductions in tobacco quotas and allotments. Filing 1040 ez Even if you are not farming when you receive the payment, it is included in self-employment earnings if it relates to your farm business (even though it is temporarily inactive). Filing 1040 ez A connection exists if it is clear the payment would not have been made but for your conduct of your farm business. Filing 1040 ez Gain or loss. Filing 1040 ez   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 self-employment earnings. Filing 1040 ez It does not matter whether the disposition is a sale, exchange, or involuntary conversion. Filing 1040 ez For example, gains or losses from the disposition of the following types of property are not included in self-employment earnings. Filing 1040 ez Investment property. Filing 1040 ez Depreciable property or other fixed assets used in your trade or business. Filing 1040 ez Livestock held for draft, breeding, sport, or dairy purposes, and not held primarily for sale, regardless of how long the livestock was held, or whether it was raised or purchased. Filing 1040 ez Unharvested standing crops sold with land held more than 1 year. Filing 1040 ez Timber, coal, or iron ore held for more than 1 year if an economic interest was retained, such as a right to receive coal royalties. Filing 1040 ez   A gain or loss from the cutting of timber is not included in self-employment earnings if the cutting is treated as a sale or exchange. Filing 1040 ez For more information on electing to treat the cutting of timber as a sale or exchange, see Timber in chapter 8. Filing 1040 ez Wages and salaries. Filing 1040 ez   Wages and salaries received for services performed as an employee and covered by social security or railroad retirement are not included in self-employment earnings. Filing 1040 ez   Wages paid in kind to you for agricultural labor, such as commodity wages, are not included in self-employment earnings. Filing 1040 ez Retired partner. Filing 1040 ez   Retirement income received by a partner from his or her partnership under a written plan is not included in self-employment earnings if all the following apply. Filing 1040 ez The retired partner performs no services for the partnership during the year. Filing 1040 ez The retired partner is owed only the retirement payments. Filing 1040 ez The retired partner's share (if any) of the partnership capital was fully paid to the retired partner. Filing 1040 ez The payments to the retired partner are lifelong periodic payments. Filing 1040 ez Conservation Reserve Program (CRP) payments. Filing 1040 ez   Under the Conservation Reserve Program (CRP), if you own or operate highly erodible or other specified cropland, you may enter into a longterm contract with the USDA, agreeing to convert to a less intensive use of that cropland. Filing 1040 ez You must include the annual rental payments and any onetime incentive payment you receive under the program on Schedule F, lines 4a and 4b. Filing 1040 ez Cost share payments you receive may qualify for the costsharing exclusion. Filing 1040 ez See Cost-Sharing Exclusion (Improvements), above. Filing 1040 ez CRP payments are reported to you on Form 1099G. Filing 1040 ez Individuals who are receiving Social Security retirement or disability benefits may exclude CRP payments when calculating self-employment tax. Filing 1040 ez See the instructions for Schedule SE (Form 1040). Filing 1040 ez Self-employed health insurance deduction. Filing 1040 ez   You cannot deduct the self-employed health insurance deduction you report on Form 1040, line 29, from self-employment earnings on Schedule SE (Form 1040). Filing 1040 ez Landlord Participation in Farming As a general rule, income and deductions from rentals and from personal property leased with real estate are not included in determining self-employment earnings. Filing 1040 ez 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 landowner will, and does, materially participate in the production or management of production of the farm products on the land. Filing 1040 ez Crop shares. Filing 1040 ez   Rent paid in the form of crop shares is included in self-employment earnings for the year you sell, exchange, give away, or use the crop shares if you meet one of the four material participation tests (discussed next) at the time the crop shares are produced. Filing 1040 ez Feeding such crop shares to livestock is considered using them. Filing 1040 ez Your gross income for figuring your self-employment earnings includes the fair market value of the crop shares when they are used as feed. Filing 1040 ez Material participation for landlords. Filing 1040 ez   You materially participate if you have an arrangement with your tenant for your participation and you meet one or more of the following tests. Filing 1040 ez You do at least three of the following. Filing 1040 ez Pay, using cash or credit, at least half the direct costs of producing the crop or livestock. Filing 1040 ez Furnish at least half the tools, equipment, and livestock used in the production activities. Filing 1040 ez Advise or consult with your tenant. Filing 1040 ez Inspect the production activities periodically. Filing 1040 ez You regularly and frequently make, or take an important part in making, management decisions substantially contributing to or affecting the success of the enterprise. Filing 1040 ez You work 100 hours or more spread over a period of 5 weeks or more in activities connected with agricultural production. Filing 1040 ez You do things that, considered in their totality, show you are materially and significantly involved in the production of the farm commodities. Filing 1040 ez These tests may be used as general guides for determining whether you are a material participant. Filing 1040 ez Example. Filing 1040 ez Drew Houston agrees to produce a crop on J. Filing 1040 ez Clarke's cotton farm, with each receiving half the proceeds. Filing 1040 ez Clarke advises Houston when to plant, spray, and pick the cotton. Filing 1040 ez During the growing season, Clarke inspects the crop every few days to determine whether Houston is properly taking care of the crop. Filing 1040 ez Houston furnishes all labor needed to grow and harvest the crop. Filing 1040 ez The management decisions made by Clarke in connection with the care of the cotton crop and his regular inspection of the crop establish that he participates to a material degree in the cotton production operations. Filing 1040 ez The income Clarke receives from his cotton farm is included in his self-employment earnings. Filing 1040 ez Methods for Figuring Net Earnings There are three ways to figure your net earnings from self-employment. Filing 1040 ez The regular method. Filing 1040 ez The farm optional method. Filing 1040 ez The nonfarm optional method. Filing 1040 ez You must use the regular method unless you are eligible to use one or both of the optional methods. Filing 1040 ez See Figure 12-1 , shown later. Filing 1040 ez Figure 12-1. Filing 1040 ez Can I Use the Optional Methods? Please click here for the text description of the image. Filing 1040 ez Figure 12–1. Filing 1040 ez Can I Use the Optional Methods? Why use an optional method?   You may want to use the optional methods (discussed later) when you have a loss or a small net profit and any one of the following applies. Filing 1040 ez You want to receive credit for social security benefit coverage. Filing 1040 ez You incurred child or dependent care expenses for which you could claim a credit. Filing 1040 ez (An optional method may increase your earned income, which could increase your credit. Filing 1040 ez ) You are entitled to the earned income credit. Filing 1040 ez (An optional method may increase your earned income, which could increase your credit. Filing 1040 ez ) You are entitled to the additional child tax credit. Filing 1040 ez (An optional method may increase your earned income, which could increase your credit. Filing 1040 ez ) Effects of using an optional method. Filing 1040 ez   Using an optional method could increase your SE tax. Filing 1040 ez Paying more SE tax may result in you getting higher social security disability or retirement benefits. Filing 1040 ez   If you use either or both optional methods, you must figure and pay the SE tax due under these methods even if you would have had a smaller SE tax or no SE tax using the regular method. Filing 1040 ez   The optional methods may be used only to figure your SE tax. Filing 1040 ez To figure your income tax, include your actual self-employment earnings in gross income, regardless of which method you use to determine SE tax. Filing 1040 ez Regular Method Multiply your total self-employment earnings by 92. Filing 1040 ez 35% (. Filing 1040 ez 9235) to get your net earnings under the regular method. Filing 1040 ez See Short Schedule SE, line 4, or Long Schedule SE, line 4a. Filing 1040 ez Net earnings figured using the regular method are also called “actual net earnings. Filing 1040 ez ” Farm Optional Method Use the farm optional method only for self-employment earnings from a farming business. Filing 1040 ez You can use this method if you meet either of the following tests. Filing 1040 ez Your gross farm income is $6,960 or less. Filing 1040 ez Your net farm profits are less than $5,024. Filing 1040 ez Gross farm income. Filing 1040 ez   Your gross farm income is the total of the amounts from: Schedule F (Form 1040), line 9, and Schedule K-1 (Form 1065), box 14, code B (from farm partnerships). Filing 1040 ez Net farm profits. Filing 1040 ez   Net farm profits generally are the total of the amounts from: Schedule F (Form 1040), line 34, and Schedule K-1 (Form 1065), box 14, code A (from farm partnerships). Filing 1040 ez However, you may need to adjust the amount reported on Schedule K-1 if you are a general partner or if it is a loss. Filing 1040 ez For more information, see Partnership income or loss , earlier. Filing 1040 ez Figuring farm net earnings. Filing 1040 ez   If you meet either of the two tests explained above, use Table 12-1. Filing 1040 ez Figuring Farm Net Earnings , to figure your net earnings from self-employment under the farm optional method. Filing 1040 ez Table 12-1. Filing 1040 ez Figuring Farm Net Earnings IF your gross farm income  is. Filing 1040 ez . Filing 1040 ez . Filing 1040 ez THEN your net earnings are equal to. Filing 1040 ez . Filing 1040 ez . Filing 1040 ez $6,960 or less Two-thirds of your gross farm income. Filing 1040 ez More than $6,960 $4,640 Optional method can reduce or eliminate SE tax. Filing 1040 ez   If your gross farm income is $6,960 or less and your farm net earnings figured under the farm optional method are less than your actual net earnings, you can use the farm optional method to reduce or eliminate your SE tax. Filing 1040 ez Your actual net earnings are your net earnings figured using the regular method, explained earlier. Filing 1040 ez Example. Filing 1040 ez Your gross farm income is $540 and your net farm profit is $460. Filing 1040 ez Consequently, your net earnings figured under the farm optional method are $360 (2/3 of $540) and your actual net earnings are $425 (92. Filing 1040 ez 35% of $460). Filing 1040 ez You owe no SE tax if you use the optional method because your net earnings under the farm optional method are less than $400. Filing 1040 ez Nonfarm Optional Method This is an optional method available for determining net earnings from nonfarm self-employment, much like the farm optional method. Filing 1040 ez If you are also engaged in a nonfarm business, you may be able to use this method to figure your nonfarm net earnings. Filing 1040 ez You can use this method even if you do not use the farm optional method for determining your farm net earnings and even if you have a net loss from your nonfarm business. Filing 1040 ez For more information about the nonfarm optional method, see Publication 334. Filing 1040 ez You cannot combine farm and nonfarm self-employment earnings to figure your net earnings under either of the optional methods. Filing 1040 ez Using Both Optional Methods If you use both optional methods, you must add the net earnings figured under each method to arrive at your total net earnings from self-employment. Filing 1040 ez You can report less than your total actual farm and nonfarm net earnings but not less than actual nonfarm net earnings. Filing 1040 ez If you use both optional methods, you can report no more than $4,640 as your combined net earnings from self-employment. Filing 1040 ez Reporting Self-Employment Tax Use Schedule SE (Form 1040) to figure and report your SE tax. Filing 1040 ez Then, enter the SE tax on line 56 of Form 1040 and attach Schedule SE to Form 1040. Filing 1040 ez Most taxpayers can use Section A–Short Schedule SE to figure their SE tax. Filing 1040 ez However, certain taxpayers must use Section B–Long Schedule SE. Filing 1040 ez Use the chart on page 1 of Schedule SE to find out which one to use. Filing 1040 ez 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. Filing 1040 ez Deduction for employer-equivalent portion of self-employment tax. Filing 1040 ez   You can deduct the employer-equivalent portion of your SE tax in figuring your adjusted gross income. Filing 1040 ez This deduction only affects your income tax. Filing 1040 ez It does not affect either your net earnings from self-employment or your SE tax. Filing 1040 ez   To deduct the tax, enter on Form 1040, line 27, the amount shown on Section A, Line 6, or Section B, line 13, Deduction for employer-equivalent portion of self-employment tax, of the Schedule SE. Filing 1040 ez Joint return. Filing 1040 ez   Even if you file a joint return, you cannot file a joint Schedule SE. Filing 1040 ez This is true whether one spouse or both spouses have self-employment earnings. Filing 1040 ez Your spouse is not considered self-employed just because you are. Filing 1040 ez If both of you have self-employment earnings, each of you must complete a separate Schedule SE. Filing 1040 ez However, if one spouse uses the Short Schedule SE and the other spouse has to use the Long Schedule SE, both can use the same form. Filing 1040 ez Attach both schedules to the joint return. Filing 1040 ez If you and your spouse operate a business as a partnership, see Business Owned and Operated by Spouses and Qualified joint venture , earlier, under Who Must Pay Self-Employment Tax . Filing 1040 ez Prev  Up  Next   Home   More Online Publications