TN 48 (11-08)
SI 00820.200 Net Earnings from Self-Employment (NESE)
Sections 1612(a)(1)(B) and 211 of the Social Security Act ;
20 CFR 416.1110(b), 416.1111(b), and 404.1065 - 404.1096
A. Definition of NESE
NESE is the gross income from any trade or business less allowable deductions for that trade or business. NESE also includes any profit or loss in a partnership.
B. Procedure - Determining Whether an Activity Constitutes Self-Employment
Consider all factors in the case when an individual alleges participating in an activity that produces income to determine if it constitutes self-employment. If a determination is made that the activity does not result in wages or NESE, then the income derived by the activity is unearned income. Sometimes, just one different factor in two similar cases can result in each case being treated differently. The examples in SI 00820.200C. illustrate how specific factors of a case may result in a different conclusion. They are not provided as generalized guidance on specific types of activities.
Mrs. Bell, an SSI recipient, reports at a redetermination that she began babysitting for her grandchild while her daughter is working. Sometimes she has the child at her home, but as a general rule, she goes to her daughter's home because the child's toys and other items are there. She does not babysit for anyone else. She receives about $20 a week from her daughter.
Although a caregiver is a recognized occupation, Mrs. Bell is not holding herself out as a provider of daycare services, nor does she have intent to produce income. The CR determines that Mrs. Bell is not self-employed.
However, if the income meets the definition of wages for the title II annual earnings test (e.g., an employer/employee relationship exists between Mrs. Bell and her daughter), it would be considered wages even though no FICA taxes are being deducted. If a determination is made that the activity does not result in wages or NESE, then the income derived by the activity is unearned income, coded as type SW on the SSR.
Mrs. Simon is filing for SSI aged benefits. When asked about any income she receives, she indicates that she does babysit for various neighbors and friends, but does not consider herself as self-employed and files no tax forms for this income. She began providing these services when her own children were young to make some extra money. She relies on obtaining new business via word of mouth. Although Mrs. Simon does not consider herself in the daycare business, she meets all of the factors indicating the existence of a trade or business in RS 01802.002. Therefore, the CR determines that she is self-employed and institutes development of the NESE.
Mr. Lyons, an SSI recipient, reports that since he needed extra money to meet his rent and food expenses, he began to collect aluminum cans off the street to redeem at the recycle center for cash. In addition, sometimes his neighbors or local organizations contact him to pick up their cans. He does not file any tax returns, but he estimates that he makes about $200 a month.
Since this is an ongoing, regular activity that includes some third party collection pickups and was established with the intent of producing income, it is determined that Mr. Lyons is self-employed and development of the NESE is initiated.
Mr. Kent, at a redetermination, reports that he earned some money cutting the lawn for one of his neighbors. His car needed some unexpected repairs and he did not have the money. His neighbor told Mr. Kent that he could cut his lawn for the month of July for $80. Since he needed the cash to pay for the repair, he decided to cut the lawn. Mr. Kent is not holding himself out as a lawn service. Further, this is not an ongoing regular activity nor does Mr. Kent plan to do this activity to make a profit. He only did it to earn enough to pay for the car repair. Therefore, it's not NESE. However, even though there was no FICA withheld, the CR should develop whether the income is wages for annual earnings test purposes (e.g., does an employer/employee relationship exist). If a determination is made that the activity does not result in wages or NESE, then the income derived by the activity is unearned income.
Processing of Fraudulently Filed SE Tax Returns for Purposes of Claiming the EITC, RS 01804.525
To compute NESE for title II, RS 01803.002
To determine self-employment status of ministers and members of religious orders,
RS 01901.600 - RS 01901.680
For factors indicating the existence of a trade or business, RS 01802.001 - RS 01802.010