What is the SE tax optional method?

What the method does

Self-employment tax is figured on your net earnings from self-employment. Under the regular method that is simply your self-employment earnings times 92.35 percent, which is the number on line 4a of Schedule SE. Publication 334 explains that there are three ways to figure net earnings: the regular method, the nonfarm optional method and the farm optional method, and that you must use the regular method to the extent you do not use an optional one.

The nonfarm optional method is a deliberate choice to report more net earnings than you actually made. When it applies, you report two-thirds of your gross nonfarm income, capped at $7,240 for 2025, even if your real profit was tiny or a loss. The publication is clear about the purpose: you may want it when you have a loss or small net profit and you want to receive credit for social security benefit coverage, or when a higher figure for self-employment earnings raises earned income used for the child and dependent care credit, the earned income credit, or the additional child tax credit.

The four tests, as the 2025 publication states them

First, you must be self-employed on a regular basis, which means your actual net earnings from self-employment were $400 or more in at least two of the three tax years before the year in which you use the method. The earlier earnings can be farm, nonfarm, or both. Second, you must have used the method fewer than five times: there is a five-year lifetime limit, and the years need not be consecutive. Third, your net nonfarm profit must be less than $7,840. Fourth, your net nonfarm profit must be less than 72.189 percent of your gross nonfarm income. For this purpose net nonfarm profit is generally Schedule C line 31 plus Schedule K-1 (Form 1065) box 14 code A, and gross nonfarm income is generally Schedule C line 7 plus box 14 code C.

The two thresholds are linked. 72.189 percent of $10,860 is $7,840, and $10,860 is also the point at which two-thirds of gross income reaches the $7,240 ceiling. Put simply, the method is designed for low-profit years where the profit is a small fraction of gross receipts, such as a business with large costs or a startup year.

How much you report

Publication 334 gives a short table: if gross nonfarm income is $10,860 or less, net earnings equal two-thirds of gross nonfarm income. If it is more than $10,860, the table in the page as read on November 2, 2026 prints $7,840. Every worked example in the same chapter, and the cap that applies when both optional methods are used, uses $7,240 instead, which is exactly two-thirds of $10,860. Because that is what two-thirds of the breakpoint gives and what the IRS’s own examples compute, this page and its calculator use $7,240 and flag the table discrepancy so you can check the current printed edition before filing.

You can never use the method to report less than your actual nonfarm net earnings, so the figure you report is the larger of the two. And you may use it only to figure SE tax: your income tax return still includes your actual earnings.

Worked examples from the publication, reproduced in the calculator

Craft business. Gross income $5,400 and net profit $1,200 in 2025. Actual net earnings are $1,108 ($1,200 times 0.9235). Net profit is under $7,840 and under 72.189 percent of gross income, so you can use the method: two-thirds of $5,400 is $3,600, which is higher, so you report $3,600. At 15.3 percent, SE tax is about $551 instead of about $170.

Same craft business, gross $1,200, net $900. Net profit is not under 72.189 percent of gross income (that limit is about $866), so you must use the regular method.

Same business, net loss of $700. You can still report $3,600. Gross $525 and net $175: both methods give under $400, so no SE tax is due under either.

Appliance repair shop. Gross $12,000, net $1,200. Actual net earnings are $1,108. Because gross income is over $10,860, you report $7,240, which is the figure the publication uses in its own example for this case. Try these inputs in the calculator above: it returns the same results.

The cost of using it, and when it is worth it

Publication 334 warns that using an optional method could increase your SE tax, and that if you use it you must figure and pay the SE tax on the optional figure even if the regular method would have produced a smaller tax or none. The trade is more SE tax now for more social security credit and, in some cases, a larger earned income credit later. The publication also notes that it may reduce your AGI through the deduction for one-half of SE tax, which can matter for credits and deductions with AGI limits, and recommends figuring AGI with and without the method.

For example, taking the craft-business case, SE tax rises from roughly $170 to roughly $551, an extra $381, to report $3,600 of earnings. Whether that is worth it depends on how close you are to the credits you would otherwise miss. A preparer can run the numbers both ways in a few minutes.

Limits of this page

This page covers the nonfarm method only. The farm optional method is in Publication 225, and using both has a combined cap of $7,240. The 92.35 percent factor, the $400 filing threshold and the 15.3 percent rate come from the same publication. For the regular calculation see the self-employment tax calculator, and for when SE tax applies at all see the $400 threshold checker.

Sources

• IRS Publication 334, Tax Guide for Small Business (2025): Figuring Net Earnings, Nonfarm Optional Method, in chapter 10 (Self-Employment Tax). Page last reviewed or updated by the IRS April 30, 2026. Read November 2, 2026.

Edition read: Publication 334 (2025), for use in preparing 2025 returns. Dollar limits and thresholds quoted on this page are for 2025 and can change; check the current publication and form instructions for your tax year. This page summarizes the publication and does not replace it. Marked for human review.