Can I use the Optional Method to figure my self-employment tax?

You can use the nonfarm optional method to figure your earnings from self-employment for only 5 years. The 5 years don’t have to be consecutive.

What are the advantages of the Optional Method?

• Social Security coverage. The optional methods may give you credit toward your Social Security coverage even though you have a loss or a small amount of income from self-employment.
• Credits affected by earned income. Using the optional methods may qualify you to claim the earned income credit (EIC), additional child tax credit (ACTC), or child and dependent care credit or give you a larger credit if your net earnings from self-employment (determined without using the optional methods) are less than $6,040. Figure the EIC, ACTC, and child and dependent care credit with and without using the optional methods to see if the optional methods will benefit you.
• Self-employed health insurance deduction. The optional methods of computing net earnings from self-employment may be used to figure your self-employed health insurance deduction.
• Other items affected by AGI. Using the optional methods may decrease your adjusted gross income (AGI), 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

What are the requirements?

• Farm Method
  • Gross farm income was $9,060 or less or your net farm profits were less
    than $6,540
  •  No limit on how many years you can use this method
  • Refer to Schedule SE instructions if this was a farm partnership
• Nonfarm Method
  • Net nonfarm profits were less than $6,540 and also less than 72.189% of your gross nonfarm income
  • Must be regularly self-employed. You meet this requirement if your actual net earnings from self-employment were $400 or more in 2 of the 3 years before the year you use the nonfarm optional method. The earnings could be from either farm, nonfarm or both.
  • The net earnings include your distributive share of partnership income
    or loss subject to SE tax.
  • Can be used for only 5 years. The 5 years don’t have to be consecutive.
• Both Methods Used
  • Cannot report more than $6,040 of net earnings from self-employment
  • Can report less than your total actual net earnings from farm and nonfarm self-employment (but not less than your actual net earnings from nonfarm self-employment alone). See Schedule SE Instructions for more Information. 

Can I change the method?

Yes. You can file an amended return (Form 1040X) to change the method used. Amended returns must be filed within 3 years of the original filing deadline.