There are three ways to figure your net earnings from self-employment:
The regular method
The non-farm optional method
The farm optional method
The Regular Method
You must use the regular method unless you are eligible to use one or both of the optional methods.
The optional methods may result in paying more tax, but these methods can be used when you have a low amount of self-employment income and want to receive higher benefits when you retire. These methods are only for purposes of the self-employment tax, not the income tax. Using the optional methods may also qualify you for other tax benefits, such as the Earned Income Credit, the Additional Child Tax Credit, and the Child and Dependent Care Credit.
Nonfarm Optional Method
You can use this optional method for earnings that do not come from farming if you meet all the following tests.
You had $400 or more in net earnings from self-employment in at least 2 of the last 3 tax years, before filing for this year.
You have used this method less than 5 years. (There is a 5-year lifetime limit.) The years do not have to be consecutive.
Your net nonfarm profits were:
Less than $1,733, and
Less than 72.189% of your gross nonfarm income.
Farm Optional Method
You can use this optional method only for earnings from a farming business if you meet either of the following tests.
Your gross farm income is $2,400 or less, or
Your net farm profits are less than $1,733.
Using Both Optional Methods
If you have both farm and nonfarm earnings, you should figure your earnings separately under each method, and then add these amounts together to arrive at your total net earnings from self-employment.
How is the self-employment tax paid?
The self-employment tax is reported on Schedule SE, which is filed with your annual federal income tax return. If you have to pay self-employment tax, you will need to file Form 1040 and attach Schedule SE, even if you don’t otherwise have to file a tax return.
When you are self-employed, you do not have tax withheld from your pay, so you need to make estimated tax payments, including the self-employment tax, during the year. You must make estimated payments if you expect to owe $1,000 or more in taxes, including self-employment tax, when you file your return. If you do not make sufficient estimated payments by the due dates, you may be subject to a penalty for underpayment of taxes when you file your return. Estimated tax payments are due on April 15th, June 15th, September 15th, and January 15th.
If you are self-employed and also work as an employee, you may be able to avoid having to make estimated tax payments by having your employer withhold more tax. You can do this by adjusting your W-4.