 So if you have W-2 type of income, for example, then you're paying Social Security and Medicare, but you're doing that through the withholdings between the employer, employee situation. So they're withholding Social Security and Medicare, at least you're part of it. If you're self-employed, then you might have a Schedule C type of business, in which case you would be subject to self-employment tax because it's an active business. If you have investments in like stocks and bonds or something like that, then or interest that you're generating from investments, then you would think that that is more of a passive investment and you would not have the gains and losses on the dividends you would think or the interest. You're not going to generally calculate self-employment tax on those and you're not generally going to be taxed on self-employment tax on gains and losses that are non-business property, like selling stocks, for example. So lost income payments. If you are self-employed and reduce or stop your business activities, any payments you receive from insurance or other sources for the lost business income is included in earnings from self-employment tax because it's still kind of business related, you would think. If you are not working, when you receive the payment, it still relates to your business and included in earning subject to self-employment tax. So you might say, hey, I closed my business or whatever, but then I still got income that's basically tied to the business. So you would think it would be still kind of like business income subject then to self-employment tax. Okay, so figuring earnings subject to self-employment tax methods for figuring net earnings. So there are three ways to figure net earnings from self-employment. One, the regular method. Two, the non-farm optional method. Three, the form optional method. You must use the regular method to the extent you do not use one or both of the optional methods. So why use an optional method, you might ask. So 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. You want to receive credit for social security benefit coverage. You incurred child or dependent care expenses for which you could claim a credit. An optional method may increase your earned income, which could increase your credit. So this is a kind of a weird situation because you have those situations where usually income is bad for taxes, but the earned income credit is trying to incentivize people to earn income. So earned income can actually be good there, which leads to these kind of weird situations to try to increase the earned income, which could be beneficial for tax. So you are entitled to the earned income credit. An optional method may increase your earned income, normally bad but possibly good sometimes for the earned income credit, which could increase your credit. You are entitled to the additional child tax credit. An additional method may increase your earned income, which could increase your credit. So effects of using an optional method. So using an optional method could increase your SE tax, self-employment tax. Paying more SE self-employment tax could result in your getting higher benefits when you retire. Most people probably wouldn't generally want to do that because you're paying in and you're going to get the benefit in the future. So usually people are going to say, hey, look, I would like to pay as little self-employment tax as I can at this point in time because I want to get the benefit now as opposed to getting some benefit in the benefit program. But you might be in some situations where you're saying, hey, I need to increase my payments into self-employment so that I could increase the amount of benefit that I'm going to be getting when I get into retirement age from social security. So using the optional methods may also decrease your AGI due to the deduction for one half of SE tax on form 1040 or form 1040 SR. So we're paying both the employer and employee portion of the tax in essence, the equivalent of with the self-employment tax equivalent to the payroll taxes. Half of that is actually deductible above the line as an adjustment to income, which could lower the AGI. It'll lower your adjusted gross income if you increase that number, which may affect your eligibility for credits, deductions, or other items that are subject to AGI limits. In other words, that number, the AGI, is what is used when you have phase outs for certain credits and deductions. So if you have a higher self-employment tax, you're going to have a higher deduction that's an above the line deduction, which could lower your AGI, which may make it easier to qualify for other deductions or credits in some cases. So figure your AGI with and without using the optional methods to see if the optional methods will benefit you. So if you use either or both optional methods, you must figure and pay the SE self-employment tax due under these methods, even if you would have had a smaller tax or no tax using the regular method. The optional methods may be used only to figure your SE self- employment tax to figure your income tax includes your actual earnings in gross income, regardless of which method used to determine self-employment tax. All right. So the regular method to figure net earnings using the regular method, multiply your self-employment earnings by 92.35. So this is where it deviates a little bit from basically the idea that you're just going to take the self-employment earnings, the bottom line of the schedule C and multiply it by, in essence, the employer and employee of the payroll taxes being the self-employment tax, they're going to reduce your earnings a little bit because we're going to multiply the earnings times 0.9235. So which is good, although a little bit confusing. So for your net earnings figured using the regular method, C line 4A of your schedule SE form 1040, net earnings figured using the regular method are also called actual net earnings. All right. Non-profit optional method. So use the non-profit optional method only for earnings that do not come from farming. So this is non-farm optional method, excuse me. So you may use this method if you meet all of the following. Number one, you are self-employed on a regular basis. The means that your actual net earnings from self-employment were $400 or more in at least two of the three tax years before the one for which you use this method. For this purpose, the prior year net earnings can be from either farm or non-farm earnings or both. Two, you have used this method less than five years. This is a five year lifetime limit. The years do not have to be one after another. Three, your net non-farm profits were a less than $6,540 and B less than 72.189% of your gross non-farm income. I used the farm optional method only for earnings from a farming business. So again, that's more of a special kind of situation or special industry and you could see publication 225 for information about that method. Joint return. Even if you file a joint return, you cannot file a joint schedule SE. So this is that weird one we saw in a prior presentation where now you have a situation where you have two people that are of course married, which you would think would result in one individual for taxes, which in essence, it kind of does when you're talking about federal income taxes because you're going to file married filing joint. But for social security taxes, you've got the situation that the benefits are applied to each social security number and therefore you have to break out between the two individuals, which you could do possibly by being a partnership and then you'd have to file a partnership return or in some instances, you may be able to file either two schedule C's or make an election so that you can basically, but you will in either case still have two schedule SE calculations so they can apply the proper amounts to each individual social security number. So this is true whether one spouse or both spouses have earnings subject to self-employment tax. If both of you have earnings subject to self-employment tax, each of you must complete a separate schedule SE, attach both schedules to the joint return more than one business. If you have more than one trade or business, you must combine the net profit from each business to figure your SE tax. A loss from one business will reduce your profit from another business. File one schedule SE showing the earnings from self-employment, but file a separate schedule C or F for each business. So you have multiple businesses, possibly two schedule C's, for example, then the schedule C's are separate and you have two separate schedules, but they might be owned by the one person with the same social security number and therefore the schedule SE, you might have one schedule SE that's combining the incomes from the two businesses that are for the same social security number with regards to the self-employment tax.