Schedule SE

Self-Employment Tax computed on Schedule SE applies to sole proprietors (Schedule C and F) and general partners of a partnership (Schedule K-1, Form 1065).

Tax rate for 2011. SE tax = net SE earnings x 13.3%, on net SE earnings up to $106,800.  For this purpose, ne SE earnings are the net profit from all trades and businesses multiplied by 92.35%.  Net SE earnings are combined with any FICA wages earned as an employee for determining when the $106,800 limit is met.

Who must file schedule SE. In general, any individual who carries on a trade or business must file Schedule SE if net earnings from all trades or businesses are $433.13 or more ($433.13 x 0.9235 = $400).

Trade or business. An activity carried on for a livelihood or in good faith to make a profit.  A taxpayer does not actually have to make a profit to be a trade or business as long as there is a motive for making a profit.  The activity does not have to be a regular full-time job to be subject to SE tax.

Rental of personal property. If the taxpayer is in the business of renting personal property, such as equipment or vehicles, income and expenses are reported on Schedule C and subject to SE tax.  If the rental activity is not conducted as a trade or business, the income is not subject to SE tax and is reported on line 21 of Form 1040.  In such cases, the related expenses are included in the total earnings by a retired farmer who rents his tractor to his son is not subject to SE tax unless the farmer is in the business of renting equipment to customers.

Income Not Subject to SE tax

1.Rental income from real estate activities and personal property leased with the real estate, except when services are also provided for the occupants (For example, a hotel).

2.Earnings by certain nonresident aliens

3.Gains or losses on the sale of investment property.

4.Interest earned by a business, except for interest charged on AR balances, or on interest earned from notes or bonds as a dealer in stocks or securities.

5.Earnings from a hobby, if the activity is not continuous or regular and the activity’s purpose is not for profit.

Reference: 1040 Quickfinder Handbook