Yes. If you meet certain IRS requirements, you may be able to use one of the optional methods to calculate your net earnings from self-employment for self-employment tax purposes.
The optional methods are designed to help taxpayers maintain eligibility for certain tax benefits and Social Security coverage, even when their self-employment income is low or they have a loss.
The IRS offers two optional methods:
- The Farm Optional Method
- The Nonfarm Optional Method
The nonfarm optional method can only be used for 5 tax years total, although those years do not have to be consecutive.
What Are the Benefits of Using an Optional Method?
Depending on your situation, using an optional method may provide several advantages.
Social Security Coverage
One of the biggest benefits is that the optional methods can help you earn Social Security credits even if your self-employment income is very low or you experienced a business loss.
Maintaining Social Security coverage may affect future retirement, disability, and survivor benefits.
Credits Based on Earned Income
Using an optional method may help you qualify for certain tax credits or increase the amount of a credit you're already eligible to receive.
These may include:
- Earned Income Credit (EIC)
- Additional Child Tax Credit (ACTC)
- Child and Dependent Care Credit
If your net self-employment earnings without the optional method are less than the IRS threshold, it may be worthwhile to compare your return both ways to determine which method provides the best result.
Self-Employed Health Insurance Deduction
The optional methods may also be used when calculating the self-employed health insurance deduction, which can reduce your taxable income if you are eligible.
Tax Benefits Affected by Adjusted Gross Income (AGI)
Using an optional method can affect your Adjusted Gross Income (AGI). Since many deductions and credits are limited by AGI, a change in AGI may increase or decrease your eligibility for certain tax benefits.
It's often helpful to compare the results with and without the optional method to determine which option is most beneficial.
What Are the Requirements for the Optional Methods?
The IRS applies different eligibility rules to the farm and nonfarm optional methods.
Farm Optional Method
You may qualify for the Farm Optional Method if one of the following applies:
- Your gross farm income was $10,860 or less, or
- Your net farm profit was less than $7,840
Additional rules include:
- There is no limit on the number of years you may use the farm optional method.
- Special rules may apply to farm partnerships. Review the Schedule SE Instructions for additional guidance.
Nonfarm Optional Method
You may qualify for the Nonfarm Optional Method if all of the following requirements are met:
- Your net nonfarm profit was less than $7,840, and
- Your net nonfarm profit was less than 72.189% of your gross nonfarm income
In addition, you must be regularly self-employed. You meet this requirement if:
- Your actual net earnings from self-employment were $400 or more in at least 2 of the 3 tax years immediately preceding the year you are claiming the optional method.
Those earnings may come from:
- Farm income
- Nonfarm income
- A combination of both
Your net earnings also include any distributive share of partnership income or loss that is subject to self-employment tax.
Important: The Nonfarm Optional Method can only be used for 5 tax years total, although the years do not have to be consecutive.
Using Both Methods
If you qualify to use both optional methods:
- You cannot report more than $7,240 of net earnings from self-employment using the optional methods.
- You may report less than your combined actual farm and nonfarm net earnings, but not less than your actual nonfarm net earnings alone.
Refer to the Schedule SE Instructions for detailed calculations and examples.
Can I Change the Method After Filing?
Yes.
If you later determine that a different method would be more beneficial, you can generally change your election by filing an amended return using Form 1040-X, Amended U.S. Individual Income Tax Return.
To make this change, the amended return must generally be filed within 3 years of the original filing deadline.