The gross income derived by an individual from any trade or business carried on by the individual, less the deductions allowed that are attributable to the trade or business, plus the individual’s distributive share (whether or not distributed) of income or loss from any trade or business carried on by a partnership of which the individual is a member.
For the deduction limits, earned income is net earnings for personal services actually rendered to the business. The individual should take into account the income tax deduction for one-half of self-employment tax and the deduction for contributions to the plan made on his/her behalf when figuring net earnings.
Net earnings include a partner’s distributive share of partnership income or loss (other than separately stated items, such as capital gains and losses). It does not include income passed through to shareholders of S corporations. Guaranteed payments to limited partners are net earnings from self-employment if they are paid for services to or for the partnership. Distributions of other income or loss to limited partners are not net earnings from self-employment.
IRC § 1402(a), IRS Publication 560
Additional Helpful Information
For SEP and qualified plans, net earnings from self-employment is gross income from trade or business (providing the self-employed individual’s personal services are a material income-producing factor) minus allowable business deductions. Allowable deductions include contributions to SEP and qualified plans for common-law employees and the deductions allowed for one-half of the individual’s self-employment tax.
- For SIMPLE plans, net earnings from self-employment is the amount on line 4 of Short Schedule SE (Form 1040), Self-Employment Tax, before subtracting any contributions made to the SIMPLE plan for the self-employed individual.