Last Updated : January 14, 2009
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Schedule SE

Schedule SE

Supplemental Income and Loss

Use Schedule SE (Form 1040) to Figure the social security tax and Medicare Tax on self Employment income if the taxpayer or Spouse was self-Employed this tax year. Schedule SE should be filed in following situations:

  • The taxpayer Net earnings from Self employment from other than church employee income were $400 or more , or
  • THE taxpayer had church employee income of $108.28 or more.

For tax year 2006, the maximum amount of self-employment income subject to social security tax is $94200.

Self-Employment Tax:
Following persons need to pay the self-employment tax :

  • Self Employed Persons: The taxpayer must pay SE tax if he has net earnings of $400 or more as a self-employed person. If the taxpayer is in the business for himself or if the taxpayer is a farmer, then he is said to have been self-employed.
    The taxpayer must also pay Se tax on his share of certain partnership income and his guaranty payments.
  • Employees of churches and church Organizations: Church Employee Income is wages that the client received as an employee (other than as a minister or member of a religious order) of a church or qualified church controlled organization that has a certificate in effect electing an exemption from employer social security and Medicare taxes. The employer does not withhold Social Security or Medicare tax from his income or pay the employer’s share of those taxes.
  • Ministers And Members Of Religious Orders: In most cases, a taxpayer must pay SE tax on salaries and other income for services performed as a minister, a member of a religious order who has not taken a vow of poverty, or a Christian Science Practitioner. But if the taxpayer filed Form 4361 and Received IRS approval, he or she will be exempt from paying SE tax on those Net Earnings.
  • Members of Certain Religious Sects: If you have conscientious objections to social security insurance because of membership in and belief in the teachings of a religious sect and which provided reasonable level of living for its dependent members, the taxpayer may be exempt from SE tax if he receives IRS approval  by filing Form 4029.
  • U.S.Citizens  Employed By Foreign Governments Or International Organizations: The taxpayer must SE tax on income earned as a U.S citizen employed by a foreign government for services performed in United States, Puerto Rico, Guam, American Samoa, common wealth of Mariana Islands or the Virgin Islands. If the taxpayer performed services elsewhere as an employee of a foreign government then those earnings are exempt from SE tax.
  • U.S.Citizens OR resident Aliens Living Outside the United States: If the taxpayer is a self –employed U.S citizen or resident alien living outside the United States, in most cases he should pay SE tax. He cannot reduce his foreign earnings from self-employment by his foreign earned income exclusion.

General Instructions:

  • The package calculates self-employment Tax based on the information entered on schedule C (Profit or Loss from Business), Schedule C-EZ, schedule F (profit or loss from farming), Schedule K-1P/S (partnership and S corporations), Form 6781, Form W-2, Form W-2GU, Form 2106, Form 2106EZ etc.
  • On the top of the form check the appropriate checkbox for taxpayer or spouse as applicable as all the value from other forms will depend upon the checkbox of taxpayer or spouse checked on those respective forms. For Eg. Value from W-2 taxpayer will flow on Schedule SE taxpayer form. If on schedule SE checkbox for spouse is checked then value will not flow on the schedule
  • In section A by answering the questions on line 1, line 2 and line 3 the package itself decides whether the taxpayer should file Short schedule or Long schedule.

Line 1 checkbox: Total of SS and RR tax and SE tax more than $94200?
The package will check the appropriate checkbox Yes or No depending upon the total SS & RR tax from form W-2, Form w-2GU whichever is present. And schedule Se line 4a.

Line 2 checkbox: Are you using Optional methods to figure net earnings?
The taxpayer will have to manually check the appropriate box from Yes or NO depending upon the use made by him in earlier years.

Line 3 checkbox: Is church income on W-2 more than $108.28?
The taxpayer will have to manually check the box Yes or No if he was a church employee and received income more than $108.28.

Below line 3:
Row-1 - Short schedule checkbox:
Depending upon the checkboxes checked on line 1, line 2 and line 3 the package will check the appropriate checkbox. Only One checkbox out of the two will be checked and value will flow in their respective parts from other forms and calculation will be done to calculate the Self Employment Tax.

Row- 1- Long schedule checkbox:
Depending upon the checkboxes checked on line 1, line 2 and line 3 the package will check the appropriate checkbox. Only One checkbox out of the two will be checked and value will flow in their respective parts from other forms and calculation will be done to calculate the Self Employment Tax.

Row-2 –Checkbox for ministers, members of religious order or Christian Science Practitioner
The taxpayer has to check this checkbox manually if any of the following applies:

  • The taxpayer is a minister, member of a religious order , or Christian Science Practitioner,
  • The taxpayer has filed Form 4361, application for exemption from SE tax for use by ministers, members of religious order, or Christian Science Practitioner.
  • The taxpayer has $400 or more of other net earnings from self-employment.

SECTION A: Use Short Schedule:
Information and values from other forms will flow in this section on line 1 to line 6 only if below line 3 row-1 checkbox “Use Short Schedule “is checked.

Line 1: Net farm profit form schedule F and schedule K-1P/S:
The package by itself will flow value from schedule F line 36 (net farm profit) and schedule K-1P/S line 14A if checkbox for farm income on this line is checked.

Line 2: Net farm profit or loss from schedule C or C-EZ or K-1P/S:
The package by itself will flow value from schedule C line 31(net profit or loss from business)and schedule C-EZ (net profit or loss from business)and schedule K-1P/S line 14A if checkbox for farm income on this line is not checked.

Line 3: Total of line 1 and Line 2
The package will do the sum of line 1 and line 2 and line 3 inner (exempt notary amount) is subtracted from the result of the sum. The net result is entered on this line.

Exempt Notary amount:
Enter on this line manually the amount received as fees for services performed as a notary public as such income is not subject to SE tax.

Line 4: Multiply line 3net earnings by 92.35%
The package multiplies line 3 by 92.35% and enters the result on this line.

Line 5- Self Employment tax:
The package calculates by itself the amount and enters on form 1040 line 58. If line 4 amount calculated is less than or equal to the limit for 2006 $94200 then the package multiplies line 4 by 15.3% and enters the result here.

If line 4 amount calculated is more than the limit for 2006 $94200 then the package multiplies 4 by 2.9% and adds $ 11160 to the result and enters the result here.

Line 6 – Deduction for ½ of self-employment tax:
The package by itself multiplies line 5 by 50% only if line 3 total income is greater than or equal to $400 and enters the result here. This line is then transferred to Form 1040 pg-1 line 27(self employment tax)

SECTION B: Use Long Schedule

Part-I: Self–Employment Tax
Information and values from other forms will flow in this section on line 1 to line 13 only if below line 3 row-1 checkbox “Use long Schedule “is checked.

Line A – Checkbox for ministers, members of religious order or Christian Science Practitioner
The taxpayer has to check this checkbox manually if any of the following applies:

  • The taxpayer is a minister, member of a religious order , or Christian Science Practitioner,
  • The taxpayer has filed Form 4361, application for exemption from SE tax for use by ministers, members of religious order, or Christian Science Practitioner.
  • The taxpayer has $400 or more of other net earnings from self-employment.

Line 1: Net farm profit form schedule F and schedule K-1P/S:
The package by itself will flow value from schedule F line 36 (net farm profit) and schedule K-1P/S line 14A if checkbox for farm income on this line is checked. But if the taxpayer elects to use the Farm optional Methods by entering the amount on line 15 then on this line value changes to Zero.

Line 2: Net farm profit or loss from schedule C or C-EZ or K-1P/S:
The package by itself will flow value from schedule C line 31(net profit or loss from business) and schedule C-EZ (net profit or loss from business) and schedule K-1P/S line 14A if checkbox for farm income on this line is not checked and line 2 inner (ministerial income).

But if the taxpayer elects to use the Nonfarm optional Methods by entering the amount on line 17 then on this line value changes to Zero.

Line 2 Inner: Net Ministerial Income subject to SE tax
On this line value flows from SE tax worksheet for Minister’s last line.

Line 3: Total of line 1 and Line 2
The package will do the sum of line 1 and line 2 and line 3 inner (exempt notary amount) is subtracted from the result of the sum. The net result is entered on this line.

Exempt Notary amount:
Enter on this line manually the amount received as fees for services performed as a notary public as such income is not subject to SE tax.

Line 4a –Is line 3 more than zero?
On this line if line 3 is greater than 0 then the package will multiply line 3 by 92.35% and enter the result here. But if line 3 is less than or equal to zero then line 3 will be entered here.

Line 4b:
The package does the sum of line 15 and line 17 and enters here. If the taxpayer is benefited by using the optional method to calculate his SE tax then the taxpayer should manually enter the amount on line 15 and line 17. The benefits flowing from use of optional method are discussed in help of line 15 and line 17.

Line 4c: Combine line 4a and 4b
The package does the sum of the line 4a and line 4b. If the result on this line is less than $400 then the taxpayer need not have to file schedule SE unless the taxpayer has church employee income of $108.28 so the package will enter 0 on this line.

Line 5a: Enter Church Employee Income
Enter he church employee income received by the taxpayer , if applicable. For more details of church employee income refer the form Help. If the taxpayer’s only income subject to self employment tax is church income then Skip lines 1 through line 4c and enter the amount of church income received on line 5.

Line 5b: Multiply line 5a by 92.35%
If church employee income is entered by taxpayer on line 5a then the package by itself calculates 92.35% of line 5a and enters the results on this line.

Line 6 – Net earnings from Self-employment:
The package by itself makes sum on line 4c and line 5b. the total is the net earnings from self-employment. The

Line 7 –Maximum allowable amount for 2006.
As per 2006 instructions the maximum amount of combined wages and self-employment earnings subject to Social Security tax for 2006 is $94200 which is kept as fixed.

Line 8a – Total security wages and tips
The package enters on this line total of line 3 and line 7 of form W-2 and Form w-2GU if added in the list.

Line 8b – Unreported tips subject to social security tax
If the taxpayer has a tip income that was not reported to the employer or allocated Tips on form W-2, then add form 4137 in the list and complete form 4137. Value on this line flows from Form 4137 Line 9.

Line 8c- Add line 8b and 8a
The package does the sum of line 8a and line 8b.

Line 9 – subtract line 8c from line 7
The package subtracts line 8c from line 7 that is maximum allowable amount $94200.

Line 10 –Multiply smaller of line 6 or line 9 by 12.4%
The package multiplies smaller of line 6 or line 9 by 12.4% and enters the result here. This is the amount of social security tax.

Line 11 – Multiply line 6 by 2.9%
The package multiplies line 6 by 2.9%. This is the amount of Medicare tax.

Line 12 – Self-employment Tax
The package does the sum of line 10 and line 11 and enters the result here. This is the amount of self-employment tax. This amount is then taken to Form 1040 Pg-2 line 58(other taxes).

Line 13 –Deduction of ½ of self-employment tax:
The package by itself multiplies line 12 by 50% only and enters the result here. This line is then transferred to Form 1040 pg-1 line 27(self employment tax).

Part-II: Optional Methods to Figure Net Earnings

Using an optional method to figure net earnings may benefit the taxpayer by providing:

  • Credit towards social security coverage even though the taxpayer has a loss or a small amount of income from self-employment.
  • A larger additional child tax credit
  • A larger child and dependent care benefit
  • A larger self-employed health insurance deduction.

However, using the optional method may increase the self-employment tax. The taxpayer must decide which method is most beneficial.

Farm Optional Method:
Use this method to figure the net earnings from farm self-employment if ---

  • The gross farm income was $2400 or less.
  • The net farm profits were less than $1733.

 
Line 14- Maximum income for optional methods:
As per 2006 instructions the maximum amount allowed under optional methods is $1600.

Line 15:
To use the farm optional method, enter on line 15 the smaller of the following:

  • 2/3 of the gross farm income (not less than 0)
  • $1600.

This line flows on this form on line 4b.

Non Farm Optional Method:
Use this method to figure the net earnings from non farm self-employment if ---

  • The gross nonfarm profits were less than 72.189% of gross farm income and the net nonfarm profits were less than $1733.
  • The taxpayer had net earnings from self-employment of at least $400 in two of the three prior years.

Also the taxpayer must be regularly self-employed to claim under this method.

Line 17:
To use the nonfarm optional method, enter on line 17 the smaller of the following:

  • 2/3 of the gross nonfarm income (not less than 0)
  • Amount on line 16.

This line flows on this form on line 4b.

Using Both Optional Methods:
If the taxpayer uses both methods to figure the net earnings the taxpayer cannot report more than $1600 total net earnings from self-employment.
For more details, refer instructions of schedule SE.

Self-Employment tax worksheets for Ministers:

Ministerial Wages from Form W-2:

  • If checkbox for ministerial income on form W-2 is checked, then the package carries line 1 to this line.
  • If all conditions for checkbox to be checked on line A are satisfied complete this worksheet of the form.
  • If checkbox on that line for manual entry is checked it allows the user to enter the amounts that he wants or if he does not have Form W-2.

Ministerial Wages from Form W-2GU:

  • If checkbox for ministerial income on form W-2GU is checked, then the package carries line 1 to this line.
  • If all conditions for checkbox to be checked on line A are satisfied complete this worksheet of the form.
  • If checkbox on that line for manual entry is checked it allows the user to enter the amounts that he wants or if he does not have Form W-2GU.

Rental value of a home or an allowance for home:
Enter on this line the amount provided by the employer as benefits for food , utilities , for himself , spouse and his dependents.

Value of a meals and lodging provided:
Enter on this line the amount provided by the employer as benefits for meals and lodging, for himself, spouse and his dependents.

Net amount subject to self employment tax:
The package by itself does the sum of these lines in the worksheet and enters the result here and on line 3 of part-1 of long schedule.

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