TN 28 (03-99)
SI 00820.210 How to Determine Net Earnings from Self-Employment (NESE)
1. Determining monthly NESE
NESE is determined on a taxable year basis. The yearly NESE is divided equally among the months in the taxable year to get the NESE for each month.
2. Offsetting net loss
Any verified net losses from self-employment are divided over the taxable year in the same way as net earnings. Then each month's net loss is deducted only from other earned income of the individual or spouse in that month.
3. Deduction for taxable years after 1989
For taxable years beginning after 1989, a 7.65 percent deduction is applied to net profit in determining NESE. Therefore, net profit is multiplied by .9235 to determine NESE. (See SI 00820.220 for where to find the correct NESE amount on the Federal income tax forms.)
NOTE: This deduction recognizes, as a business expense, part of the Social Security taxes paid. If Social Security tax is not paid (e.g., in situations involving less than $400 per year in NESE, net losses, and when no tax return is filed), the deduction does not apply. The detailed earnings query (DEQY) and Schedule SE already reflect the .9235 adjustment.
4. Minimum/Maximum amounts creditable
NESE is earned income for title XVI purposes without regard to the minimum and maximum amounts creditable for title II coverage purposes.
5. Computing NESE/Title II optional method
The title II optional method of computing NESE for farm and nonfarm businesses CANNOT BE USED.
Only the actual net earnings are used in determining NESE for title XVI.
NOTE: This does not affect the availability of the option for the same individual under title II.
6. Exemptions from coverage
NESE is earned income for title XVI purposes regardless of whether the earnings are exempt from Social Security coverage.
Any distributive share (whether or not distributed) of income or loss from a trade or business carried on by a partnership is included in NESE, unless specifically excluded per
RS 01802.300 - RS 01802.375.
8. In-kind remuneration for work
NESE may include in-kind income (e.g., food, clothing, shelter, a car, etc.). In-kind income from NESE is valued at its current market value (SI 00835.020).
1. Determining monthly NESE
Divide the entire taxable year's NESE equally among the number of months in the taxable year, even if the business:
A period of less than 12 months may be a taxable year if:
the basis for computing and reporting income changes (e.g., fiscal to calendar year); or
the taxpayer dies (the taxable year ends on the date of death, and net earnings are computed as of the date of death.); or
the taxable year is closed by the Commissioner of IRS.
NOTE: An individual's taxable year is not ended when he/she goes out of business.
2. Offsetting net loss
Divide any verified net loss for a taxable year evenly over the months in the taxable year.
Input the verified monthly net loss from self-employment to the system on the ISEI screen. The system will subtract each monthly net loss amount from the individual's other earned income (NESE or wages) in the same month.
The system cannot automatically apply a net loss from self-employment to a couple's record when both members of the couple have earnings that will be offset by the net loss. These cases are MSSICS exclusions. Compute these cases manually. Input the net loss from self-employment on form 1719b. Apply the monthly net loss first to the member of the couple who incurred the loss. Then apply any balance of the monthly net loss to the earned income of the spouse.
In couples cases where there is no leftover net loss from self-employment to apply to the spouse, follow the instructions for an individual in SI 00820.210B.2.b.
This offset applies whether a couple filed a joint income tax return or separate returns, and regardless of which member of the couples listed below incurred the loss:
3. Work expenses
If an individual is self-employed (whether or not he/she is also a wage earner), reduce his/her earned income by any allowable work expenses which have not already been used to compute NESE. (See SI 00820.545B.1. for necessary work expense development.)
4. Withdrawals for personal use
When an individual alleges (or you discover) that cash or in-kind items are withdrawn from a business for personal use, proceed as follows:
Ask the individual whether the withdrawals were properly accounted for in determining NESE. That is, were they either deducted on the individual's Federal income tax return in determining the cost of goods sold or the cost of expenses incurred, or deducted on his business records?
Accept the individual's allegation of whether the withdrawals were properly accounted for.
|IF the withdrawals are . . .||THEN . . .|
Properly accounted for
Do not charge them again as income.
Not properly accounted for
Ask the individual to estimate the value of the cash or in-kind withdrawals. Deduct that amount from the cost of goods sold or the cost of expenses incurred on the profit and loss statement to arrive at the proper NESE.
If the individual cannot or will not provide the profit and loss statement, but alleges an amount of NESE, add the value of the withdrawals to the individual's allegation of NESE.
If an individual alleges withdrawals for personal use but cannot or will not estimate the value of the withdrawals, or if the individual's personal expenses exceed the stated NESE and no other income is available, develop for unstated income per SI 00810.035.