U.S. Individual Income Tax Return

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Page 1 of 4 of 2008 Instructions for Schedule SE (Form 1040) 11:58 - 19-NOV-2008
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Department of the Treasury
Internal Revenue Service

2008 Instructions for Schedule SE (Form 1040)
Use Schedule SE (Form 1040) to figure the tax due on net earnings from self-employment.
Social Security Administration uses the information from Schedule SE to figure your
Self-Employment The
benefits under the social security program. This tax applies no matter how old you are and
even if you are already getting social security or Medicare benefits.
Tax
See Pub. 225 or Pub. 334.
Additional information.

Section references are to the Internal
Revenue Code unless otherwise noted.

What’s New
For 2008, the maximum amount of
self-employment income subject to social
security tax is $102,000.
Conservation Reserve Program (CRP)
payments. The Food, Conservation, and

Energy Act of 2008 excludes CRP payments from self-employment tax for individuals receiving social security benefits
for retirement or disability. This is effective
for payments received after December 31,
2007. See the instructions for line 1b on
page SE-3.
Optional methods to figure net earnings.

Beginning after December 31, 2007, the
amount of gross and net income from
self-employment you may have when using
the farm optional method or nonfarm optional method has increased. This allows
electing taxpayers to secure up to four credits of social security benefits coverage. In
future years, the thresholds will be indexed
to maintain that level of coverage. See Optional Methods on page SE-4.

General Instructions
Who Must File Schedule SE
You must file Schedule SE if:
• Your net earnings from self-employment (see page SE-3) from other than
church employee income were $400 or
more, or
• You had church employee income of
$108.28 or more — see Employees of
Churches and Church Organizations later.

Who Must Pay
Self-Employment (SE) Tax?
Self-Employed Persons
You must pay SE tax if you had net earnings of $400 or more as a self-employed
person. If you are in business (farm or nonfarm) for yourself, you are self-employed.
You must also pay SE tax on your share
of certain partnership income and your
guaranteed payments. See Partnership Income or Loss on page SE-3.

Employees of Churches and
Church Organizations

lowable expenses from your self-employment earnings and attach an explanation.

If you had church employee income of
$108.28 or more, you must pay SE tax.
Church employee income is wages you received as an employee (other than as a minister or member of a religious order) of a
church or qualified church-controlled organization that has a certificate in effect
electing an exemption from employer social security and Medicare taxes.

If you were a U.S. citizen or resident
alien serving outside the United States as a
minister or member of a religious order and
you must pay SE tax, you cannot reduce
your net earnings by the foreign earned income exclusion or the foreign housing exclusion or deduction.

Ministers and Members of
Religious Orders

Members of Certain Religious
Sects

In most cases, you must pay SE tax on salaries and other income for services you performed as a minister, a member of a
religious order who has not taken a vow of
poverty, or a Christian Science practitioner.
But if you filed Form 4361 and received
IRS approval, you will be exempt from
paying SE tax on those net earnings. If you
had no other income subject to SE tax,
enter “Exempt — Form 4361” on Form
1040, line 57. However, if you had other
earnings of $400 or more subject to SE tax,
see line A at the top of Long Schedule SE.

If you have conscientious objections to social security insurance because of your
membership in and belief in the teachings
of a religious sect recognized as being in
existence at all times since December 31,
1950, and which has provided a reasonable
level of living for its dependent members,
you are exempt from SE tax if you received
IRS approval by filing Form 4029. In this
case, do not file Schedule SE. Instead, enter
“Exempt — Form 4029” on Form 1040,
line 57. See Pub. 517 for details.

If you have ever filed Form
2031 to elect social security
coverage on your earnings as a
minister, you cannot revoke
that election.
If you must pay SE tax, include this income on either Short or Long Schedule SE,
line 2. But do not report it on Long Schedule SE, line 5a; it is not considered church
employee income. Also, include on line 2:
• The rental value of a home or an allowance for a home furnished to you (including payments for utilities), and
• The value of meals and lodging provided to you, your spouse, and your dependents for your employer’s convenience.
However, do not include on line 2:
• Retirement benefits you received
from a church plan after retirement, or
• The rental value of a home or an allowance for a home furnished to you (including payments for utilities) after
retirement.
If you were a duly ordained minister
who was an employee of a church and you
must pay SE tax, the unreimbursed business expenses that you incurred as a church
employee are allowed only as an itemized
deduction for income tax purposes. However, when figuring SE tax, subtract the al-

SE-1
Cat. No. 24334P

See Pub. 517 for details.

U.S. Citizens Employed by
Foreign Governments or
International Organizations
You must pay SE tax on income you earned
as a U.S. citizen employed by a foreign
government (or, in certain cases, by a
wholly owned instrumentality of a foreign
government or an international organization under the International Organizations
Immunities Act) for services performed in
the United States, Puerto Rico, Guam,
American Samoa, the Commonwealth of
the Northern Mariana Islands, or the U.S.
Virgin Islands. Report income from this
employment on either Short or Long
Schedule SE, line 2. If you performed services elsewhere as an employee of a foreign
government or an international organization, those earnings are exempt from SE
tax.
Exception — Dual citizens. A person with

dual U.S.-foreign citizenship is generally
considered to be a U.S. citizen for social
security purposes. However, if you are a
U.S. citizen and also a citizen of a country
with which the United States has a bilateral
social security agreement, other than Canada or Italy, your work for the government
of that foreign country is always exempt
from U.S. social security taxes. For further
information about these agreements, see
the exception shown in the next section.

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U.S. Citizens or Resident Aliens
Living Outside the United States
If you are a self-employed U.S. citizen or
resident alien living outside the United
States, in most cases you must pay SE tax.
You cannot reduce your foreign earnings
from self-employment by your foreign
earned income exclusion.
Exception. The United States has social

security agreements with many countries to
eliminate dual taxes under two social security systems. Under these agreements, you
must generally pay social security and
Medicare taxes to only the country you live
in.
The United States now has social security agreements with the following countries: Australia, Austria, Belgium, Canada,
Chile, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Japan, Luxembourg, the Netherlands, Norway,
Portugal, South Korea, Spain, Sweden,
Switzerland, and the United Kingdom. Additional agreements are expected in the future. If you have questions about
international social security agreements,
you can:
1. Visit the Social Security Administration (SSA) website at www.socialsecurity.
gov/international;
2. Call the SSA’s Office of International
Programs at:
a. (410) 965-0144 for questions on benefits under agreements, or
b. (410) 965-3549 for questions on the
coverage rules of the agreements; or
3. Write to Social Security Administration, Office of International Programs, P.O.
Box 17741, Baltimore, MD 21235-7741
USA.
If your self-employment income is exempt from SE tax, you should get a statement from the appropriate agency of the
foreign country verifying that your
self-employment income is subject to social security coverage in that country. If the
foreign country will not issue the statement, contact the SSA at the address shown
above. Do not complete Schedule SE. Instead, attach a copy of the statement to
Form 1040 and enter “Exempt, see attached
statement” on Form 1040, line 57.

Chapter 11 Bankruptcy Cases
While you are a debtor in a chapter 11
bankruptcy case, your net profit or loss
from self-employment (for example, from
Schedule C or Schedule F) will not be included in your Form 1040 income. Instead,
it will be included on the income tax return
(Form 1041) of the bankruptcy estate.
However, you (not the bankruptcy estate)
are responsible for paying self-employment
tax on your net earnings from self-employment.
Enter on the dotted line to the left of
Schedule SE, line 3, “Chap. 11 bankruptcy
income” and the amount of your net profit

or (loss). Combine that amount with the total of lines 1a, 1b, and 2 (if any) and enter
the result on line 3.
For other reporting requirements, see
page 20 in the instructions for Form 1040.

More Than One Business
If you had two or more businesses, your net
earnings from self-employment are the
combined net earnings from all of your
businesses. If you had a loss in one business, it reduces the income from another.
Figure the combined SE tax on one Schedule SE.

Joint Returns
Show the name of the spouse with self-employment income on Schedule SE. If both
spouses have self-employment income,
each must file a separate Schedule SE.
However, if one spouse qualifies to use
Short Schedule SE (front of form) and the
other must use Long Schedule SE (back of
form), both can use the same form. One
spouse should complete the front and the
other the back.
Include the total profits or losses from
all businesses on Form 1040, as appropriate. Enter the combined SE tax on Form
1040, line 57.

Community Income
If any of the income from a business (including farming) is community income,
then the income and deductions are reported based on the following.
• If only one spouse participates in the
business, all of the income from that business is the self-employment earnings of the
spouse who carried on the business.
• If both spouses participate, the income
and deductions are allocated to the spouses
based on their distributive shares.
• If either or both you and your spouse
are partners in a partnership, see Partnership Income or Loss on page SE-3.
• If you and your spouse elected to treat
the business as a qualifying joint venture,
see Qualified Joint Ventures on this page.
Married filing separately. If you and your

spouse had community income and file
separate returns, attach Schedule SE to the
return of the spouse with the self-employment income. Also, attach Schedule(s) C,
C-EZ, or F (showing the spouse’s share of
community income and expenses) to the return of each spouse.
If you are the spouse who carried on the
business, you must include on Schedule
SE, line 3, the net profit or (loss) reported
on the other spouse’s Schedule C, C-EZ, or
F (except income not included in net earnings from self-employment as explained on
page SE-3). Enter on the dotted line to the
left of Schedule SE, line 3, “Community income taxed to spouse” and the amount of
any net profit or (loss) allocated to your
spouse as community income. Combine

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that amount with the total of lines 1a, 1b,
and 2 and enter the result on line 3.
If you are not the spouse who carried on
the business and you had no other income
subject to SE tax, enter “Exempt community income” on Form 1040, line 57; do not
file Schedule SE. However, if you had
$400 or more of other earnings subject to
SE tax, include on Schedule SE, line 1a or
2, the net profit or (loss) from Schedule(s)
C, C-EZ, or F allocated to you as community income. Also, enter on the dotted line
to the left of Schedule SE, line 3, “Exempt
community income” and the allocated
amount. If that amount is a net profit, subtract it from the total of lines 1a, 1b, and 2,
and enter the result on line 3. If that amount
is a loss, treat it as a positive amount, add it
to the total of lines 1a, 1b, and 2, and enter
the result on line 3.

Community income included
on Schedule(s) C, C-EZ, or F
must be divided for income tax
purposes based on the community property laws of your state. See Pub.
555 for more information.

Qualified Joint Ventures
If you and your spouse materially participate (see Material participation in the 2008
Instructions for Schedule C) as the only
members of a jointly owned and operated
business, and you file a joint return for the
tax year, you can make a joint election to be
taxed as a qualified joint venture instead of
a partnership.
To make this election, you must divide
all items of income, gain, loss, deduction,
and credit attributable to the business between you and your spouse in accordance
with your respective interests in the venture. Each of you must file a separate
Schedule C, C-EZ, or F. On each line of
your separate Schedule C, C-EZ, or F, you
must enter your share of the applicable income, deduction, or loss. Each of you also
must file a separate Schedule SE to pay SE
tax, as applicable.
Rental real estate business. If you and
your spouse make the election for your
rental real estate business, the income generally is not subject to SE tax (for an exception, see item 3 under Other Income and
Losses Included in Net Earnings From
Self-Employment on page SE-3).

If the election is made for a farm rental
business that is not included in self-employment, file two forms 4835, Farm
Rental Income and Expenses.

Fiscal Year Filers
If your tax year is a fiscal year, use the tax
rate and earnings base that apply at the time
the fiscal year begins. Do not prorate the
tax or earnings base for a fiscal year that
overlaps the date of a rate or earnings base
change.

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Specific Instructions
Read the flowchart on page 1 of Schedule
SE to see if you can use Section A, Short
Schedule SE, or if you must use Section B,
Long Schedule SE. For either section, you
need to know what to include as net earnings from self-employment. Read the following instructions to see what to include
as net earnings and how to fill in either
Short or Long Schedule SE, lines 1 and 2.
Enter all negative amounts in parentheses.

Line 1b (Short or Long
Schedule SE)
If you were receiving social security retirement or social security disability benefits at
the time you received your Conservation
Reserve Program (CRP) payment(s), enter
the amount of your taxable CRP
payment(s) on line 1b. These payments are
included on Schedule F, line 6b, or listed
on Schedule K-1 (Form 1065), box 20,
code X.

Net Earnings From
Self-Employment
In most cases, net earnings include your net
profit from a farm or nonfarm business. If
you were a partner in a partnership, see the
following instructions.

Partnership Income or Loss
If you were a general or limited partner in a
partnership, include on line 1a or line 2,
whichever applies, the amount of net earnings from self-employment from Schedule
K-1 (Form 1065), box 14, code A, and
Schedule K-1 (Form 1065-B), box 9, code
J1. General partners should reduce this
amount before entering it on Schedule SE
by any section 179 expense deduction
claimed, unreimbursed partnership expenses claimed, and depletion claimed on
oil and gas properties. However, if you reduce the amount you enter on Schedule SE,
attach an explanation. See Partner’s Instructions for Schedule K-1 (Form 1065)
for details. Limited partners include only
guaranteed payments for services actually
rendered to or on behalf of the partnership.
If a partner died and the partnership
continued, include in self-employment income the deceased’s distributive share of
the partnership’s ordinary income or loss
through the end of the month in which he or
she died. See section 1402(f).
If you were married and both you and
your spouse were partners in a partnership,
each of you must report your net earnings
from self-employment from the partnership. Each of you must file a Schedule SE
and report the partnership income or loss
on Schedule E (Form 1040), Part II, for income tax purposes. If only one of you was a
partner in a partnership, the spouse who
was the partner must report his or her net
earnings from self-employment from the
partnership.
Community income. Your own distributive share of partnership income is included

in figuring your net earnings from self-employment. Unlike the division of that income between spouses for figuring income
tax, no part of your share can be included in
figuring your spouse’s net earnings from
self-employment.

Share Farming
You are considered self-employed if you
produced crops or livestock on someone
else’s land for a share of the crops or livestock produced (or a share of the proceeds
from the sale of them). This applies even if
you paid another person (an agent) to do the
actual work or management for you. Report
your net earnings for income tax purposes
on Schedule F (Form 1040) and for SE tax
purposes on Schedule SE. See Pub. 225 for
details.

Other Income and Losses
Included in Net Earnings
From Self-Employment
1. Rental income from a farm if, as landlord, you materially participated in the production or management of the production
of farm products on this land. This income
is farm earnings. To determine whether you
materially participated in farm management or production, do not consider the activities of any agent who acted for you. The
material participation tests for landlords are
explained in chapter 12 of Pub. 225.
2. Cash or a payment-in-kind from the
Department of Agriculture for participating
in a land diversion program.
3. Payments for the use of rooms or
other space when you also provided substantial services for the convenience of
your tenants. Examples are hotel rooms,
boarding houses, tourist camps or homes,
trailer parks, parking lots, warehouses, and
storage garages. See chapter 5 of Pub. 334
for more information.
4. Income from the retail sale of newspapers and magazines if you were age 18 or
older and kept the profits.
5. Income you receive as a direct seller.
Newspaper carriers or distributors of any
age are direct sellers if certain conditions
apply. See chapter 5 of Pub. 334 for details.
6. Amounts received by current or former self-employed insurance agents and
salespersons that are:
a. Paid after retirement but figured as a
percentage of commissions received from
the paying company before retirement,
b. Renewal commissions, or
c. Deferred commissions paid after retirement for sales made before retirement.
However, certain termination payments received by former insurance salespersons
are not included in net earnings from
self-employment (as explained in item 10
under Income and Losses Not Included in
Net Earnings From Self-Employment beginning on this page).
7. Income of certain crew members of
fishing vessels with crews of normally
fewer than 10 people. See chapter 10 of
Pub. 334 for details.

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8. Fees as a state or local government
employee if you were paid only on a fee
basis and the job was not covered under a
federal-state social security coverage
agreement.
9. Interest received in the course of any
trade or business, such as interest on notes
or accounts receivable.
10. Fees and other payments received by
you for services as a director of a corporation.
11. Recapture amounts under sections
179 and 280F that you included in gross
income because the business use of the
property dropped to 50% or less. Do not
include amounts you recaptured on the disposition of property. See Form 4797.
12. Fees you received as a professional
fiduciary. This may also apply to fees paid
to you as a nonprofessional fiduciary if the
fees relate to active participation in the operation of the estate’s business, or the management of an estate that required extensive
management activities over a long period
of time.
13. Gain or loss from section 1256 contracts or related property by an options or
commodities dealer in the normal course of
dealing in or trading section 1256 contracts.

Income and Losses Not
Included in Net Earnings
From Self-Employment
1. Salaries, fees, etc., subject to social
security or Medicare tax that you received
for performing services as an employee, including services performed as a public official (except as a fee basis government
employee as explained in item 8 under
Other Income and Losses Included in Net
Earnings From Self-Employment) or as an
employee or employee representative
under the railroad retirement system.
2. Fees received for services performed
as a notary public. If you had no other income subject to SE tax, enter “Exempt — Notary” on Form 1040, line 57; do
not file Schedule SE. However, if you had
other earnings of $400 or more subject to
SE tax, enter “Exempt — Notary” and the
amount of your net profit as a notary public
from Schedule C or Schedule C-EZ on the
dotted line to the left of Schedule SE, line
3. Subtract that amount from the total of
lines 1a, 1b, and 2 and enter the result on
line 3.
3. Income you received as a retired partner under a written partnership plan that
provides for lifelong periodic retirement
payments if you had no other interest in the
partnership and did not perform services
for it during the year.
4. Income from real estate rentals if you
did not receive the income in the course of
a trade or business as a real estate dealer.
Report this income on Schedule E, or on
Schedule C or C-EZ if you and your spouse
made an election to be taxed as a qualified
joint venture.
5. Income from farm rentals (including
rentals paid in crop shares) if, as landlord,

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you did not materially participate in the
production or management of the production of farm products on the land. See chapter 12 of Pub. 225 for details.
Report this income on Form 4835. Use
two Forms 4835 if you and your spouse
made an election to be taxed as a qualified
joint venture.
6. Payments you receive from the Conservation Reserve Program if you are receiving social security benefits for
retirement or disability. Deduct these payments on line 1b of Schedule SE.
7. Dividends on shares of stock and interest on bonds, notes, etc., if you did not
receive the income in the course of your
trade or business as a dealer in stocks or
securities.
8. Gain or loss from:
a. The sale or exchange of a capital asset;
b. The sale, exchange, involuntary conversion, or other disposition of property unless the property is stock in trade or other
property that would be includible in inventory, or held primarily for sale to customers
in the ordinary course of the business; or
c. Certain transactions in timber, coal,
or domestic iron ore.
9. Net operating losses from other years.
10. Termination payments you received
as a former insurance salesperson if all of
the following conditions are met.
a. The payment was received from an
insurance company because of services you
performed as an insurance salesperson for
the company.
b. The payment was received after termination of your agreement to perform
services for the company.
c. You did not perform any services for
the company after termination and before
the end of the year in which you received
the payment.
d. You entered into a covenant not to
compete against the company for at least a
1-year period beginning on the date of termination.
e. The amount of the payment depended
primarily on policies sold by or credited to
your account during the last year of the
agreement, or the extent to which those policies remain in force for some period after
termination, or both.
f. The amount of the payment did not
depend to any extent on length of service or
overall earnings from services performed
for the company (regardless of whether eligibility for the payment depended on length
of service).

Statutory Employee Income
If you were required to check the box on
Schedule C or C-EZ, line 1, because you
were a statutory employee, do not include
the net profit or (loss) from that Schedule
C, line 31 (or the net profit from Schedule
C-EZ, line 3), on Short or Long Schedule
SE, line 2. But if you file Long Schedule
SE, be sure to include statutory employee

social security wages and tips from Form
W-2 on line 8a.

Optional Methods
How Can the Optional Methods
Help You?
Social security coverage. The optional

methods may give you credit toward your
social security coverage even though you
have a loss or a small amount of income
from self-employment.
Earned income credit (EIC). Using the optional methods may qualify you to claim
the EIC or give you a larger credit if your
net earnings from self-employment (determined without using the optional methods)
are less than $4,200. Figure the EIC with
and without using the optional methods to
see if the optional methods will benefit you.
Additional child tax credit. Using the optional methods may qualify you to claim
the additional child tax credit or give you a
larger credit if your net earnings from
self-employment (determined without using the optional methods) are less than
$4,200. Figure the additional child tax
credit with and without using the optional
methods to see if the optional methods will
benefit you.
Child and dependent care credit. The optional methods may help you qualify for
this credit or give you a larger credit if your
net earnings from self-employment (determined without using the optional methods)
are less than $4,200. Figure this credit with
and without using the optional methods to
see if the optional methods will benefit you.
Self-employed health insurance deduction.

The optional methods of computing net
earnings from self-employment may be
used to figure your self-employed health
insurance deduction.

Using the optional methods
may give you the benefits described above, but they may
also increase your SE tax.
Changing Your Method
You can change the method after you file
your return. That is, you can change from
the regular to the optional method or from
the optional to the regular method. To do
this, file Form 1040X.

Farm Optional Method
You may use this method to figure your net
earnings from farm self-employment if
your gross farm income was $6,300 or less
or your net farm profits were less than
$4,548. Net farm profits are:
• The total of the amounts from Schedule F (Form 1040), line 36, and Schedule
K-1 (Form 1065), box 14, code A, minus
• The amount you would have entered
on Schedule SE, line 1b, had you not used
the optional method.
There is no limit on how many years
you can use this method.
Under this method, report in Part II, line
15, two-thirds of your gross farm income,

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up to $4,200, as your net earnings. This
method can increase or decrease your net
earnings from farm self-employment even
if the farming business had a loss.
For a farm partnership, figure your share
of gross income based on the partnership
agreement. With guaranteed payments,
your share of the partnership’s gross income is your guaranteed payments plus
your share of the gross income after it is
reduced by all guaranteed payments made
by the partnership. If you were a limited
partner, include only guaranteed payments
for services you actually rendered to or on
behalf of the partnership.

Nonfarm Optional Method
You may be able to use this method to figure your net earnings from nonfarm
self-employment if your net nonfarm profits were less than $4,548 and also less than
72.189% of your gross nonfarm income.
Net nonfarm profits are the total of the
amounts from:
• Schedule C (Form 1040), line 31,
• Schedule C-EZ (Form 1040), line 3,
• Schedule K-1 (Form 1065), box 14,
code A (from other than farm partnerships),
and
• Schedule K-1 (Form 1065-B),
box 9, code J1.
To use this method, you also must be
regularly self-employed. You meet this requirement if your actual net earnings from
self-employment were $400 or more in 2 of
the 3 years preceding the year you use the
nonfarm optional method. The net earnings
of $400 or more could be from either farm
or nonfarm earnings or both. The net earnings include your distributive share of partnership income or loss subject to SE tax.
Use of the nonfarm optional method
from nonfarm self-employment is limited
to 5 years. The 5 years do not have to be
consecutive.
Under this method, report in Part II, line
17, two-thirds of your gross nonfarm income, up to $4,200, as your net earnings.
But you cannot report less than your actual
net earnings from nonfarm self-employment.
Figure your share of gross income from
a nonfarm partnership in the same manner
as a farm partnership. See Farm Optional
Method on this page for details.

Using Both Optional
Methods
If you can use both methods, you can report
less than your total actual net earnings from
farm and nonfarm self-employment, but
you cannot report less than your actual net
earnings from nonfarm self-employment
alone.
If you use both methods to figure net
earnings, you cannot report more than
$4,200 of net earnings from self-employment.