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Net Earnings from Self-Employment

Excerpted from "Social Security Handbook". See the up-to-date, official Social Security Handbook at ssa.gov.

1200. Net Earnings from Self-Employment

1200.1 How are net earnings from self-employment calculated?

To calculate the net earnings from self-employment, follow the steps below:

  1. Add up your total gross income as calculated under the income tax law. Include income from all your trades and businesses.

  2. Subtract all the deductions, including the allowances for depreciation that you are allowed when you calculate your income tax from the result in (A). This gives you your net earnings.

  3. Effective with taxable years beginning after 12/31/89 multiply the result obtained in B. by .9235 (i.e., 100% - 7.65% = 92.35% or 0.9235) to derive your net earnings.

Note: If you have more than one business, calculate net earnings by adding up the net profits or losses from all the businesses. Net earnings also include any ordinary income or loss from partnerships. If any part of your income is included in gross earnings from self-employment, expenses connected with this income cannot be deducted.

1200.2 Are there other ways of calculating net earnings from self-employment?

Under certain circumstances, optional methods of computing net earnings from self- employment are available. For a discussion of these methods, see §§1233-1235and §§1241-1244.

1200.3 What resources are available to help with calculations?

Definitions of terms used in calculating income for income tax purposes also apply to calculating net earnings from self-employment. For further information on these calculations, see the tax guides available from any Internal Revenue Service office, especially: Farmer's Tax Guide, Internal Revenue Service Publication No. 225, and Tax Guide for Small Business, Internal Revenue Service Publication No. 334.

Last Revised: Jul. 20, 2006

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There are 2 Comments

I am a psychologist and I have contracts with several agencies but they pay me with a W-2. I had a W-2 income of $60,000 in 2010 but I owned a business in 2009 that went Chapter 7 BK and I carried the loss over to 2010 and my total net income for 2010 has a loss of $198,000.

I have been getting Social Security since 2008 when I turned 62. My 2011 net income will be the same with more loss carried over from the loss of my business in 2009 with a W-2 income of $60,000 from my current employment as a psychologist. I have been told that I have to pay the Social Security I received in 2010 and 2011 back because I made too much money.

I do not understand this as I have the right under the current tax laws to carry forward a loss from a business I owned which brought my net income to a loss during these years. I have to appeal this but if there is no way I can win I do not want to waste my time. Can you please explain why I have to pay back the Social Security when I have a loss on my tax returns for these years?

Sounds like there are two possible effects of your NOL (net operating loss) on :

(1) Any FICA taxes you may have to pay on wages or self-employment income.

(2) Money you must pay back on your Social Security benefits due to the Social Security earnings limit.

Sounds like you are concerned about issue (2).

For case (1), the IRS states, "NOL carryovers and/or carrybacks have no affect on the self-employment tax liability of the year to which they are carried."

http://www.irs.gov/irm/part4/irm_04-011-011.html#d0e265

For case (2), the SSA states, "If you earn wages and are self-employed, a net loss from self-employment will reduce the income counted towards your earnings test limit."

http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/277

So it sounds as if you have good cause for appeal any earnings limit judgment against you.


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