Figuring Earnings Subject to SE Tax: Small-Business Taxes (2025 IRS Guide)

This guide covers “Figuring Earnings Subject to SE Tax” within small-business taxes. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 334 (2025), Tax Guide for Small Business, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

Generally, you must pay SE tax and file Schedule SE (Form 1040) if your net earnings from self-employment were $400 or more. Use Schedule SE (Form 1040) to figure net earnings from self-employment.

Figuring Earnings Subject to SE Tax

Methods for Figuring Net Earnings

There are three ways to figure net earnings from self-employment.

1. The regular method.

2. The nonfarm optional method.

3. The farm optional method.

You must use the regular method to the extent you don’t use one or both of the optional methods.

Why use an optional method?

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.)

• You are entitled to the earned income credit. (An optional method may increase your earned income, which could increase your credit.)

• You are entitled to the additional child tax credit. (An optional method may increase your earned income, which could increase your credit.)

Effects of using an optional method.

Using an optional method could increase your SE tax. Paying more SE tax could result in your getting higher benefits when you retire.

Using the optional methods may also decrease your AGI due to the deduction for one-half of SE tax on Form 1040 or 1040-SR, which may affect your eligibility for credits, deductions, or other items that are subject to an AGI limit. Figure your AGI with and without using the optional methods to see if the optional methods will benefit you.

If you use either or both optional methods, you must figure and pay the SE 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 tax. To figure your income tax, include your actual earnings in gross income, regardless of which method you use to determine SE tax.

Regular Method

To figure net earnings using the regular method, multiply your self-employment earnings by 92.35% (0.9235). For your net earnings figured using the regular method, see line 4a of your Schedule SE (Form 1040).

Net earnings figured using the regular method are also called actual net earnings.

Nonfarm Optional Method

Use the nonfarm optional method only for earnings that don’t come from farming. You may use this method if you meet all the following tests.

1. You are self-employed on a regular basis. This means that your actual net earnings from self-employment were $400 or more in at least 2 of the 3 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 nonfarm earnings or both.

2. You have used this method less than 5 years. (There is a 5-year lifetime limit.) The years don’t have to be one after another.

3. Your net nonfarm profits were:

   1. Less than $7,840, and

   2. Less than 72.189% of your gross nonfarm income.

Net nonfarm profit.

Net nonfarm profit is generally the total of the amounts from:

• Line 31 of Schedule C (Form 1040); and

• Box 14, code A, of Schedule K-1 (Form 1065) (from nonfarm partnerships).

However, you may need to adjust the amount reported on Schedule K-1 (Form 1065) if you are a general partner or if it is a loss.

Gross nonfarm income.

Your gross nonfarm income is generally the total of the amounts from:

• Line 7 of Schedule C (Form 1040); and

• Box 14, code C, of Schedule K-1 (Form 1065) (from nonfarm partnerships).

Figuring Nonfarm Net Earnings

If you meet the three tests explained earlier, use the following table to figure your nonfarm net earnings from self-employment under the nonfarm optional method.

Table 10-1. Figuring Nonfarm Net Earnings

Optional net earnings less than actual net earnings.

You can’t use this method to report an amount less than your actual nonfarm net earnings from self-employment. Your actual nonfarm net earnings are your nonfarm net earnings figured using the regular method, explained earlier.

Gross nonfarm income of $10,860 or less.

The following examples illustrate how to figure net earnings when gross nonfarm income is $10,860 or less.

Example 1. Net nonfarm profit less than $7,840 and less than 72.189% of gross nonfarm income.

You run a craft business. Your actual net earnings from self-employment were $800 in 2023 and $900 in 2024. You meet the test for being self-employed on a regular basis. You have used the nonfarm optional method less than 5 years. Your gross income and net profit in 2025 are as follows.

Your actual net earnings for 2025 are $1,108 ($1,200 × 0.9235). Because your net profit is less than $7,840 and less than 72.189% of your gross income, you can use the nonfarm optional method to figure net earnings of $3,600 (²/₃ × $5,400). Because these net earnings are higher than your actual net earnings, you can report net earnings of $3,600 for 2025.

Example 2. Net nonfarm profit less than $7,840 but not less than 72.189% of gross nonfarm income.

Assume that in Example 1 your gross income is $1,200 and your net profit is $900. You must use the regular method to figure your net earnings. You can’t use the nonfarm optional method because your net profit is not less than 72.189% of your gross income.

Example 3. Net loss from a nonfarm business.

Assume that in Example 1 you have a net loss of $700. You can use the nonfarm optional method and report $3,600 (²/₃ × $5,400) as your net earnings.

Example 4. Nonfarm net earnings less than $400.

Assume that in Example 1 you have gross income of $525 and a net profit of $175. In this situation, you would not pay any SE tax under either the regular method or the nonfarm optional method because your net earnings under both methods are less than $400.

Gross nonfarm income of more than $10,860.

The following examples illustrate how to figure net earnings when gross nonfarm income is more than $10,860.

Example 1. Net nonfarm profit less than $7,840 and less than 72.189% of gross nonfarm income.

You run an appliance repair shop. Your actual net earnings from self-employment were $10,500 in 2023 and $9,500 in 2024. You meet the test for being self-employed on a regular basis. You have used the nonfarm optional method less than 5 years. Your gross income and net profit in 2025 are as follows.

Your actual net earnings for 2025 are $1,108 ($1,200 × 0.9235). Because your net profit is less than $7,840 and less than 72.189% of your gross income, you can use the nonfarm optional method to figure net earnings of $7,240. Because these net earnings are higher than your actual net earnings, you can report net earnings of $7,240 for 2025.

Example 2. Net nonfarm profit not less than $7,840.

Assume that in Example 1 your net profit is $8,900. You must use the regular method. You can’t use the nonfarm optional method because your net nonfarm profit is not less than $7,840.

Example 3. Net loss from a nonfarm business.

Assume that in Example 1 you have a net loss of $700. You can use the nonfarm optional method and report $7,240 as your net earnings from self-employment.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 334 (2025), Tax Guide for Small Business: Self-Employment (SE) Tax — Who Must Pay SE Tax? — Figuring Earnings Subject to SE Tax — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.