Determining a client's self-employment tax entails more than just completing Schedule SE.
In some cases, self-employment tax may be reduced by eliminating from the computation any earnings that are not subject to the tax or by shifting earnings between years or from one spouse to another. In certain circumstances, using an optional method for determining self-employment tax permits a client to continue Social Security benefit coverage despite low income or a loss for the year.
This article describes the different types of income exempt from self-employment tax, suggests ways in which net self-employment earnings may be reduced or shifted and explains when the optional methods for determining the tax are used.
Clients Not Subject to Self-Employment Tax
Certain taxpayers are partly or fully exempt from self-employment tax provisions. For example, the tax does not apply if net earnings from self-employment are less than $400.(1) Also, the tax is not applicable to nonresident aliens if they do not reside in the Virgin Islands, Guam, American Samoa or Puerto Rico. Aliens employed in the U.S. are exempt on salaries and wages from an international organization or a foreign government or wholly-owned instrumentality of one.(2)
A client who is conscientiously opposed to insurance benefits for disability, illness, death or retirement - based on the beliefs of a recognized religion - may file for exemption from self-employment tax (for church-related earnings only). Similarly, ministers and Christian Science practitioners may apply for exemption if they meet certain requirements. If a church or church-related organization elects exemption from Social Security taxes, employees who do not individually file for exemption generally owe self-employment tax.(3)
Income Not Subject to Self-Employment Tax
Although the trade or business income of a sole proprietor, independent contractor or partner generally is subject to self-employment tax, the following types of earnings are not.
* Most gains and losses on business assets;
* Gains and losses on sales, exchanges or other dispositions of business assets (including the recapture of depreciation) generally are not self-employment income unless the property is inventory or held primarily for sale to customers.
However, …
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