Yes, there is self-employment tax associated with farm income if you are self-employed as a farmer. The self-employment tax applies to net earnings from farming activities, which are reported on Schedule F (Form 1040). This tax is used to fund Social Security and Medicare and is calculated based on your net farm profit.
Who Must Pay Self-Employment Tax on Farm Income?
- Self-employed farmers must pay self-employment tax if their net earnings from farming are $400 or more.
- Net earnings are determined by subtracting farm expenses from gross farm income, as reported on Schedule F (Form 1040).
- Share farmers (those who produce crops or livestock on land owned by another and receive a share of the proceeds) are also considered self-employed and must pay self-employment tax on their share of the crop or livestock proceeds.
Figuring Self-Employment Earnings from Farming
- Use Schedule F (Form 1040) to determine your net farm profit, which is used to calculate self-employment earnings.
- Income from farm rentals, including government commodity program payments (e.g., USDA Dairy Margin Coverage), is included in self-employment earnings if the landowner materially participates in farming activities.
- Payments for lost income (e.g., due to reduced farming activities) are also included in self-employment earnings if they relate to your farm business.
Farm Optional Method for Reducing Self-Employment Tax
- You may use the farm optional method to reduce or eliminate self-employment tax if your gross farm income is $10,860 or less, or if your net farm profits are less than $7,840.
- Under this method, net earnings are calculated as follows:
- If gross farm income ≤ $10,860: Net earnings = two-thirds of gross farm income.
- If gross farm income > $10,860: Net earnings = $7,240 (maximum under this method).
- This method can reduce your self-employment tax if the optional net earnings are less than your actual net earnings.
Deductions Related to Self-Employment Tax
- You cannot deduct self-employment tax as a farm business expense on Schedule F.
- However, you can deduct one-half of your self-employment tax as an adjustment to income on Schedule 1 (Form 1040), line 15, to reduce your adjusted gross income.
Source:
Publication 225 (Farmers' Tax Guide)
Publication 334 (Tax Guide for Small Business)
Schedule F (Form 1040)
Form 1040 (Schedule SE)
Disclaimer: Always verify details with the current Federal or State Department of Revenue Forms and Instructions. For complex situations, consult a CPA or tax attorney.