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What Is Self-Employment Income?

Self-employment (SE) income is income you earn from being self-employed, and which may be subject to self-employment tax. According to the IRS, you are self-employed if you carry on a trade or business as a sole proprietor, as an independent contractor, as a member of a partnership, or you are otherwise in business for yourself. It should be mentioned that part-time work, including work you do on the side from your primary job, might qualify as self-employment. What follows is a discussion of several sources and whether they yield self-employment income in particular circumstances.

Independent Contractors and Sole Proprietors

Tax treatment is determined by worker classification. Income you earn as a sole proprietor or independent contractor is self-employment income. If your work hours and the method and procedures you follow in your work are not controlled or dictated by the person or firm who pays you for this work, then you are generally considered to be an independent contractor.

Tip: If the person or firm that hires you has the legal right to control or dictate your work schedule and procedures, as well as direct the result of your work, then you are generally an employee. This is true even if that person or firm allows you very wide discretion in choosing your work schedule and procedures. However, if that person or firm can only direct the final result of your work, then you are generally not an employee.

Tip: The fact that the person or firm that hires you provides you with a place to work and the tools necessary for that work also tends to indicate that you are an employee.

If the person or firm that hires you has the right to direct what procedures you use in your work and the number of hours per week that you work, you are generally considered to be an employee, even if most or all of your work is done at home via the use of a computer, fax, modem, and telephone that you own and for which you pay.

Partners

If you are a member of a partnership that carries on a trade or business, your distributive share of its income or loss from the trade or business is included in your income from self-employment. Guaranteed payments from your partnership should be included, along with your share of earnings and losses, when you figure your net earnings from self-employment. Limited partners do not have to include distributive shares of partnership income (or loss) in self-employment income. Guaranteed payments, however, such as salary and professional fees received for services performed during the year, are included as self-employment income.

Corporate Payments

Whether income you receive from a corporation is self-employment income depends on the reason for the payment.

Corporate Director

Fees received for performing services as a director of a corporation are self-employment income. It doesn't matter whether the fees are for going to directors' meetings or for serving on committees.

Corporate Employee

Even if you own most or all of the stock in a corporation, your income as an employee or officer of the corporation isn't self-employment income.

S Corporation Shareholders or Officers

If you are a shareholder in an S corporation, your share of the corporation's taxable income isn't self-employment income, even though you include it in your gross income for income tax purposes. If you are a shareholder and also an officer of an S corporation and perform substantial services, you are an employee of the S corporation. Your payment for services is subject to withholding for Social Security and Medicare taxes and isn't self-employment income, regardless of what the S corporation calls the payments.

Wages, Salaries, and Tips

Wages you receive for services performed as an employee and covered by Social Security or railroad retirement are not self-employment income. Tips received for work done as an employee are also excluded from self-employment income.

Gains and Losses

A gain or loss from the disposition of property that is neither stock in trade nor held primarily for sale to customers doesn't count as self-employment income. The type of disposition (sale, exchange, or involuntary conversion) is irrelevant. The following are examples of dispositions of property that aren't included in self-employment income:

  • Investment property
  • Depreciable property or other fixed assets used in your trade or business
  • Livestock held for draft, dairy, breeding, or sporting purposes and not held primarily for sale, regardless of how long the livestock were held or whether they were raised or purchased
  • Standing crops sold with land held more than one year
  • Timber, coal, or iron ore held for more than one year, if an economic interest was retained, such as a right to receive coal royalties

A gain or loss from the cutting of timber is not self-employment income if the cutting is treated as a sale or exchange.

Dividends

Dividends on securities you own generally aren't self-employment income. One notable exception is if you are a dealer in securities who is not holding the securities for speculation or investment.

Interest

Interest you receive isn't self-employment income unless you receive it in your trade or business. However, if you do receive interest income in your trade or business as a dealer in stocks and securities and it involves interest on accounts receivable or from bonds or notes, then it would be self-employment income. By comparison, such interest income wouldn't be self-employment income if the interest were on stocks or securities that are held for speculation or investment.

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Lost Income Payments

If you are self-employed and reduce or stop your business activities, any payment you receive from insurance or other sources for the lost income of your business is self-employment income. If you aren't working when you receive the payment, it still relates to your business (even though it's temporarily inactive) and is self-employment income. If any payment you receive has a connection to your trade or business, the payment is self-employment income. A connection exists if a payment clearly wouldn't have been made but for your conduct of the trade or business.

Part-Time Business

Income you receive from a part-time business is self-employment income. It can be a business you conduct on the side, in addition to your regular job.

Example(s): Shelley fixes televisions and radios in her spare time. She has her own shop as well as equipment and tools. She gets customers through advertising and word-of-mouth. Her income from her repair shop is self-employment income.

Real Estate Rent

Rent from real estate and personal property leased with real estate generally is not self-employment income. If, however, you receive rent as a real estate dealer, then include the rental income and related deductions in figuring self-employment income.

Rent From Hotels, Boarding Houses, or Apartments

Rents received for use and occupancy of hotels, boarding houses, apartments, or trailer parks can in some cases be self-employment income. If you provide services beyond those normally provided with the rental of rooms for occupancy only, then the rental payments are self-employment income. For instance, services primarily for occupants' convenience, such as maid service, will qualify rents received as self-employment income. Basic services such as heat and light, however, aren't primarily for occupants' convenience and won't qualify the rental payments as self-employment income.

Research Grants

If you receive payments under a research grant but you aren't under the control of either the grantor foundation or the grantee institution, then you are an independent contractor. If so, any payment of research grant funds to you will be treated as self-employment income.

U.S. Possession Self-Employment Income

Self-employment income from activities in a U.S. possession is subject to self-employment tax, even if your possession income is exempt from U.S. income tax. The following are treated as U.S. possessions:

  • Guam
  • American Samoa
  • The U.S. Virgin Islands
  • The Commonwealth of the Northern Mariana Islands
  • Puerto Rico

Form to File

If you must file Form 1040, report all of your self-employment income on Schedule SE, even if your possession income isn't otherwise reported on Form 1040. If you don't have to file Form 1040, use Form 1040-SS (or Form 1040-PR if appropriate) to report your self-employment income.

Tip: For further information on U.S. citizens in U.S. possessions, get Publication 570, Tax Guide for Individuals with Income from U.S. Possessions.

Specific Circumstances and Categories

Following are some specific, commonly encountered circumstances and how they're treated for self-employment tax purposes.

  • Writers who receive royalties: Royalties for the writing of books are generally considered to be self-employment income.
  • Directors: If you are not an employee of the company for which you serve as a director, fees paid to you for serving as a director are self-employment income.
  • Nurses: If you are a registered or licensed practical nurse who works directly for private clients, you are considered self-employed. If you are hired by a hospital or health care facility or provider who directs which private clients you get and when you work for them, you are considered an employee. If your clients are assigned by a private agency and you are paid directly by that agency, you will likely be considered an employee by the IRS.
  • Lecturer: If you actively seek and frequently give lectures for a fee, this is considered self-employment income. However, if you only give lectures infrequently, fees paid are not self-employment income.
  • Nonresident Alien: If you are a nonresident alien, you are exempt from paying Schedule SE self-employment taxes.

Caution: This exemption does not apply if you live in Puerto Rico, Guam, American Samoa, or the U.S. Virgin Islands.

  • Baby-sitters: If you baby-sit at the parents' home and are under their instructions, you are considered an employee. If you baby-sit at your home and set the nature of the services provided, you are considered to be self-employed.
  • Consulting: In virtually every circumstance, the IRS will consider fees paid for consulting as self-employment income subject to the self-employment tax.
  • Clergy: Special rules can apply to clergy, including the ability to file for exemption from self-employment taxes based on conscientious objection or religious objection grounds. For more information, clergy should consult with their accountant or tax attorney.
  • Executors: This area is divided into professional and nonprofessional executors.
  1. If you are a professional executor (e.g., a professional fiduciary), your income will always be considered self-employment income.
  2. If you are a nonprofessional executor or administrator overseeing the estate of a deceased immediate family member, other relative, or friend, any fees paid to you are not considered self-employment income, unless all of the following three circumstances are true: a) Part of the estate you're overseeing includes an active trade or business. b) You are an active participant in the business. c) Some or all of the fees you are paid relate to your running of the trade or business.
  • Technical Service Contractors: If you are a computer technician, consulting engineer, or similar technical service contractor, you will generally be considered an employee if you regularly receive your assignments from a technical service agency (or agencies). If, however, you contract directly with the clients for whom you work, and you are treated as an independent contractor, then you will be considered to be self-employed and subject to self-employment taxation.

 

 

This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of  The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.

 

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