1242.1 What is the optional method of computing non-farm net earnings?
The optional method of computing net earnings from non-farm self-employment is similar to the farm option, but is more limited in its operation. It may be used for no more than five taxable years, which need not be consecutive. It is available for a taxable year only if:
Your actual net earnings from non-farm self-employment are less than $1,600 and less than two-thirds of the gross non-farm income; and
Your actual net earnings were $400 or more (including your distributive share of the net income or loss from any partnership of which you are a member) in at least two of the three consecutive years immediately preceding the taxable year for which you elect to use the non-farm option; and
If you are engaged in both non-farm and farm businesses, the actual non-farm net earnings plus the actual farm earnings (or optional farm earnings, if computed under §1235) are less than $1,600. The non-farm option operates in either of two ways if the above requirements are met.
If your gross income from non-farm self-employment is $2,400 or less during a taxable year beginning after 1972, then you may count as net earnings from non-farm self-employment either: (1) the actual net non-farm earnings; or (2) two-thirds of the gross non-farm income. You may not count less than the actual net earnings from non-farm self-employment.
If your gross income from non-farm self-employment is more than $2,400 and the net non-farm earnings are less than $1,600 during a taxable year beginning after 1972, you may count as net earnings from non-farm self-employment the actual net non-farm earnings or $1,600. You may not count less than the actual net earnings from non-farm self-employment.
You are engaged in non-farm self-employment only and had non-farm gross income of $2,700. Your net non-farm profit was $800. You may report either $800 or $1,600 as your net non-farm earnings. Even if you had operated at a loss, you still could have reported $1,600. If your net non-farm profit had exceeded $1,600, you would have to report your actual net non-farm profits as your net earnings from non-farm self-employment. For a table illustrating application of the option, see §1243.
NOTE: Effective with tax years after 12/31/07 the maximum amount reportable using the optional method of reporting will be equal to the amount of earnings needed for four quarters of coverage (QC) for a given year. For example, for tax year 2009 the maximum amount reportable using the optional method of reporting is $4,360. See sections 212-212.7 and 1301-1301.2 of the Social Security Handbook to determine the amount of earnings needed to acquire a QC and/or four QC's for a given tax year beginning with calendar year 1977 and after. Further, the maximum "net non farm profit" is increased to less than $4,721 for tax year 2009. See 2009 IRS Schedule SE Instructions and IRS Form Schedule SE for 2009 or pertinent tax year(s) involved at http://www.irs.gov/.
1242.2 If the optional method is used for one year, must it be used in years afterward?
No. If the optional method is used for one year, it does not have to be used for the next year. However, if it is used, it must be applied to all farm earnings from self-employment for that year. It may be used only to increase reported net non-farm earnings and may be used even if the non-farm operation resulted in a loss.
Last Revised: Apr. 19, 2010