26 U.S.C. § 1402 : US Code - Section 1402: Definitions

Search 26 U.S.C. § 1402 : US Code - Section 1402: Definitions

(a) Net earnings from self-employment
The term "net earnings from self-employment" means the gross
income derived by an individual from any trade or business carried
on by such individual, less the deductions allowed by this subtitle
which are attributable to such trade or business, plus his
distributive share (whether or not distributed) of income or loss
described in section 702(a)(8) from any trade or business carried
on by a partnership of which he is a member; except that in
computing such gross income and deductions and such distributive
share of partnership ordinary income or loss -
(1) there shall be excluded rentals from real estate and from
personal property leased with the real estate (including such
rentals paid in crop shares) together with the deductions
attributable thereto, unless such rentals are received in the
course of a trade or business as a real estate dealer; except
that the preceding provisions of this paragraph shall not apply
to any income derived by the owner or tenant of land if (A) such
income is derived under an arrangement, between the owner or
tenant and another individual, which provides that such other
individual shall produce agricultural or horticultural
commodities (including livestock, bees, poultry, and fur-bearing
animals and wildlife) on such land, and that there shall be
material participation by the owner or tenant (as determined
without regard to any activities of an agent of such owner or
tenant) in the production or the management of the production of
such agricultural or horticultural commodities, and (B) there is
material participation by the owner or tenant (as determined
without regard to any activities of an agent of such owner or
tenant) with respect to any such agricultural or horticultural
commodity;
(2) there shall be excluded dividends on any share of stock,
and interest on any bond, debenture, note, or certificate, or
other evidence of indebtedness, issued with interest coupons or
in registered form by any corporation (including one issued by a
government or political subdivision thereof), unless such
dividends and interest are received in the course of a trade or
business as a dealer in stocks or securities;
(3) there shall be excluded any gain or loss -
(A) which is considered as gain or loss from the sale or
exchange of a capital asset,
(B) from the cutting of timber, or the disposal of timber,
coal, or iron ore, if section 631 applies to such gain or loss,
or
(C) from the sale, exchange, involuntary conversion, or other
disposition of property if such property is neither -
(i) stock in trade or other property of a kind which would
properly be includible in inventory if on hand at the close
of the taxable year, nor
(ii) property held primarily for sale to customers in the
ordinary course of the trade or business;
(4) the deduction for net operating losses provided in section
172 shall not be allowed;
(5) if -
(A) any of the income derived from a trade or business (other
than a trade or business carried on by a partnership) is
community income under community property laws applicable to
such income, the gross income and deductions attributable to
such trade or business shall be treated as the gross income and
deductions of the spouse carrying on such trade or business or,
if such trade or business is jointly operated, treated as the
gross income and deductions of each spouse on the basis of
their respective distributive share of the gross income and
deductions; and
(B) any portion of a partner's distributive share of the
ordinary income or loss from a trade or business carried on by
a partnership is community income or loss under the community
property laws applicable to such share, all of such
distributive share shall be included in computing the net
earnings from self-employment of such partner, and no part of
such share shall be taken into account in computing the net
earnings from self-employment of the spouse of such partner;
(6) a resident of Puerto Rico shall compute his net earnings
from self-employment in the same manner as a citizen of the
United States but without regard to section 933;
(7) the deduction for personal exemptions provided in section
151 shall not be allowed;
(8) an individual who is a duly ordained, commissioned, or
licensed minister of a church or a member of a religious order
shall compute his net earnings from self-employment derived from
the performance of service described in subsection (c)(4) without
regard to section 107 (relating to rental value of parsonages),
section 119 (relating to meals and lodging furnished for the
convenience of the employer), and section 911 (relating to
citizens or residents of the United States living abroad), but
shall not include in such net earnings from self-employment the
rental value of any parsonage or any parsonage allowance (whether
or not excludable under section 107) provided after the
individual retires, or any other retirement benefit received by
such individual from a church plan (as defined in section 414(e))
after the individual retires;
(9) the exclusion from gross income provided by section 931
shall not apply;
(10) there shall be excluded amounts received by a partner
pursuant to a written plan of the partnership, which meets such
requirements as are prescribed by the Secretary, and which
provides for payments on account of retirement, on a periodic
basis, to partners generally or to a class or classes of
partners, such payments to continue at least until such partner's
death, if -
(A) such partner rendered no services with respect to any
trade or business carried on by such partnership (or its
successors) during the taxable year of such partnership (or its
successors), ending within or with his taxable year, in which
such amounts were received, and
(B) no obligation exists (as of the close of the
partnership's taxable year referred to in subparagraph (A))
from the other partners to such partner except with respect to
retirement payments under such plan, and
(C) such partner's share, if any, of the capital of the
partnership has been paid to him in full before the close of
the partnership's taxable year referred to in subparagraph (A);
(11) the exclusion from gross income provided by section
911(a)(1) shall not apply;
(12) in lieu of the deduction provided by section 164(f)
(relating to deduction for one-half of self-employment taxes),
there shall be allowed a deduction equal to the product of -
(A) the taxpayer's net earnings from self-employment for the
taxable year (determined without regard to this paragraph), and
(B) one-half of the sum of the rates imposed by subsections
(a) and (b) of section 1401 for such year;
(13) there shall be excluded the distributive share of any item
of income or loss of a limited partner, as such, other than
guaranteed payments described in section 707(c) to that partner
for services actually rendered to or on behalf of the partnership
to the extent that those payments are established to be in the
nature of remuneration for those services;
(14) in the case of church employee income, the special rules
of subsection (j)(1) shall apply;
(15) in the case of a member of an Indian tribe, the special
rules of section 7873 (relating to income derived by Indians from
exercise of fishing rights) shall apply, and
(16) the deduction provided by section 199 shall not be
allowed.
If the taxable year of a partner is different from that of the
partnership, the distributive share which he is required to include
in computing his net earnings from self-employment shall be based
on the ordinary income or loss of the partnership for any taxable
year of the partnership ending within or with his taxable year. In
the case of any trade or business which is carried on by an
individual or by a partnership and in which, if such trade or
business were carried on exclusively by employees, the major
portion of the services would constitute agricultural labor as
defined in section 3121(g) -
(i) in the case of an individual, if the gross income derived
by him from such trade or business is not more than $2,400, the
net earnings from self-employment derived by him from such trade
or business may, at his option, be deemed to be 66 2/3 percent
of such gross income; or
(ii) in the case of an individual, if the gross income derived
by him from such trade or business is more than $2,400 and the
net earnings from self-employment derived by him from such trade
or business (computed under this subsection without regard to
this sentence) are less than $1,600, the net earnings from self-
employment derived by him from such trade or business may, at
his option, be deemed to be $1,600; and
(iii) in the case of a member of a partnership, if his
distributive share of the gross income of the partnership derived
from such trade or business (after such gross income has been
reduced by the sum of all payments to which section 707(c)
applies) is not more than $2,400, his distributive share of
income described in section 702(a)(8) derived from such trade or
business may, at his option, be deemed to be an amount equal to
66 2/3 percent of his distributive share of such gross income
(after such gross income has been so reduced); or
(iv) in the case of a member of a partnership, if his
distributive share of the gross income of the partnership derived
from such trade or business (after such gross income has been
reduced by the sum of all payments to which section 707(c)
applies) is more than $2,400 and his distributive share (whether
or not distributed) of income described in section 702(a)(8)
derived from such trade or business (computed under this
subsection without regard to this sentence) is less than $1,600,
his distributive share of income described in section 702(a)(8)
derived from such trade or business may, at his option, be deemed
to be $1,600.
For purposes of the preceding sentence, gross income means -
(v) in the case of any such trade or business in which the
income is computed under a cash receipts and disbursements
method, the gross receipts from such trade or business reduced by
the cost or other basis of property which was purchased and sold
in carrying on such trade or business, adjusted (after such
reduction) in accordance with the provisions of paragraphs (1)
through (7) and paragraph (9) of this subsection; and
(vi) in the case of any such trade or business in which the
income is computed under an accrual method, the gross income from
such trade or business, adjusted in accordance with the
provisions of paragraphs (1) through (7) and paragraph (9) of
this subsection;
and, for purposes of such sentence, if an individual (including a
member of a partnership) derives gross income from more than one
such trade or business, such gross income (including his
distributive share of the gross income of any partnership derived
from any such trade or business) shall be deemed to have been
derived from one trade or business.
The preceding sentence and clauses (i) through (iv) of the second
preceding sentence shall also apply in the case of any trade or
business (other than a trade or business specified in such second
preceding sentence) which is carried on by an individual who is
self-employed on a regular basis as defined in subsection (h), or
by a partnership of which an individual is a member on a regular
basis as defined in subsection (h), but only if such individual's
net earnings from self-employment as determined without regard to
this sentence in the taxable year are less than $1,600 and less
than 66 2/3 percent of the sum (in such taxable year) of such
individual's gross income derived from all trades or businesses
carried on by him and his distributive share of the income or loss
from all trades or businesses carried on by all the partnerships of
which he is a member; except that this sentence shall not apply to
more than 5 taxable years in the case of any individual, and in no
case in which an individual elects to determine the amount of his
net earnings from self-employment for a taxable year under the
provisions of the two preceding sentences with respect to a trade
or business to which the second preceding sentence applies and with
respect to a trade or business to which this sentence applies shall
such net earnings for such year exceed $1,600.
(b) Self-employment income
The term "self-employment income" means the net earnings from
self-employment derived by an individual (other than a nonresident
alien individual, except as provided by an agreement under section
233 of the Social Security Act) during any taxable year; except
that such term shall not include -
(1) in the case of the tax imposed by section 1401(a), that
part of the net earnings from self-employment which is in excess
of (i) an amount equal to the contribution and benefit base (as
determined under section 230 of the Social Security Act) which is
effective for the calendar year in which such taxable year
begins, minus (ii) the amount of the wages paid to such
individual during such taxable years; or
(2) the net earnings from self-employment, if such net earnings
for the taxable year are less than $400.
For purposes of paragraph (1), the term "wages" (A) includes such
remuneration paid to an employee for services included under an
agreement entered into pursuant to the provisions of section
3121(l) (relating to coverage of citizens of the United States who
are employees of foreign affiliates of American employers), as
would be wages under section 3121(a) if such services constituted
employment under section 3121(b), and (B) includes compensation
which is subject to the tax imposed by section 3201 or 3211,.(!1)
An individual who is not a citizen of the United States but who is
a resident of the Commonwealth of Puerto Rico, the Virgin Islands,
Guam, or American Samoa shall not, for purposes of this chapter be
considered to be a nonresident alien individual. In the case of
church employee income, the special rules of subsection (j)(2)
shall apply for purposes of paragraph (2).
(c) Trade or business
The term "trade or business", when used with reference to self-
employment income or net earnings from self-employment, shall have
the same meaning as when used in section 162 (relating to trade or
business expenses), except that such term shall not include -
(1) the performance of the functions of a public office, other
than the functions of a public office of a State or a political
subdivision thereof with respect to fees received in any period
in which the functions are performed in a position compensated
solely on a fee basis and in which such functions are not covered
under an agreement entered into by such State and the
Commissioner of Social Security pursuant to section 218 of the
Social Security Act;
(2) the performance of service by an individual as an employee,
other than -
(A) service described in section 3121(b)(14)(B) performed by
an individual who has attained the age of 18,
(B) service described in section 3121(b)(16),
(C) service described in section 3121(b)(11), (12), or (15)
performed in the United States (as defined in section
3121(e)(2)) by a citizen of the United States, except service
which constitutes "employment" under section 3121(y),
(D) service described in paragraph (4) of this subsection,
(E) service performed by an individual as an employee of a
State or a political subdivision thereof in a position
compensated solely on a fee basis with respect to fees received
in any period in which such service is not covered under an
agreement entered into by such State and the Commissioner of
Social Security pursuant to section 218 of the Social Security
Act,
(F) service described in section 3121(b) (20), and
(G) service described in section 3121(b)(8)(B);
(3) the performance of service by an individual as an employee
or employee representative as defined in section 3231;
(4) the performance of service by a duly ordained,
commissioned, or licensed minister of a church in the exercise of
his ministry or by a member of a religious order in the exercise
of duties required by such order;
(5) the performance of service by an individual in the exercise
of his profession as a Christian Science practitioner; or
(6) the performance of service by an individual during the
period for which an exemption under subsection (g) is effective
with respect to him.
The provisions of paragraph (4) or (5) shall not apply to service
(other than service performed by a member of a religious order who
has taken a vow of poverty as a member of such order) performed by
an individual unless an exemption under subsection (e) is effective
with respect to him.
(d) Employee and wages
The term "employee" and the term "wages" shall have the same
meaning as when used in chapter 21 (sec. 3101 and following,
relating to Federal Insurance Contributions Act).
(e) Ministers, members of religious orders, and Christian Science
practitioners
(1) Exemption
Subject to paragraph (2), any individual who is (A) a duly
ordained, commissioned, or licensed minister of a church or a
member of a religious order (other than a member of a religious
order who has taken a vow of poverty as a member of such order)
or (B) a Christian Science practitioner, upon filing an
application (in such form and manner, and with such official, as
may be prescribed by regulations made under this chapter)
together with a statement that either he is conscientiously
opposed to, or because of religious principles he is opposed to,
the acceptance (with respect to services performed by him as such
minister, member, or practitioner) of any public insurance which
makes payments in the event of death, disability, old age, or
retirement or makes payments toward the cost of, or provides
services for, medical care (including the benefits of any
insurance system established by the Social Security Act) and, in
the case of an individual described in subparagraph (A), that he
has informed the ordaining, commissioning, or licensing body of
the church or order that he is opposed to such insurance, shall
receive an exemption from the tax imposed by this chapter with
respect to services performed by him as such minister, member, or
practitioner. Notwithstanding the preceding sentence, an
exemption may not be granted to an individual under this
subsection if he had filed an effective waiver certificate under
this section as it was in effect before its amendment in 1967.
(2) Verification of application
The Secretary may approve an application for an exemption filed
pursuant to paragraph (1) only if the Secretary has verified that
the individual applying for the exemption is aware of the grounds
on which the individual may receive an exemption pursuant to this
subsection and that the individual seeks exemption on such
grounds. The Secretary (or the Commissioner of Social Security
under an agreement with the Secretary) shall make such
verification by such means as prescribed in regulations.
(3) Time for filing application
Any individual who desires to file an application pursuant to
paragraph (1) must file such application on or before whichever
of the following dates is later: (A) the due date of the return
(including any extension thereof) for the second taxable year for
which he has net earnings from self-employment (computed without
regard to subsections (c)(4) and (c)(5)) of $400 or more, any
part of which was derived from the performance of service
described in subsection (c)(4) or (c)(5); or (B) the due date of
the return (including any extension thereof) for his second
taxable year ending after 1967.
(4) Effective date of exemption
An exemption received by an individual pursuant to this
subsection shall be effective for the first taxable year for
which he has net earnings from self-employment (computed without
regard to subsections (c)(4) and (c)(5)) of $400 or more, any
part of which was derived from the performance of service
described in subsection (c)(4) or (c)(5), and for all succeeding
taxable years. An exemption received pursuant to this subsection
shall be irrevocable.
(f) Partner's taxable year ending as the result of death
In computing a partner's net earnings from self-employment for
his taxable year which ends as a result of his death (but only if
such taxable year ends within, and not with, the taxable year of
the partnership), there shall be included so much of the deceased
partner's distributive share of the partnership's ordinary income
or loss for the partnership taxable year as is not attributable to
an interest in the partnership during any period beginning on or
after the first day of the first calendar month following the month
in which such partner died. For purposes of this subsection -
(1) in determining the portion of the distributive share which
is attributable to any period specified in the preceding
sentence, the ordinary income or loss of the partnership shall be
treated as having been realized or sustained ratably over the
partnership taxable year; and
(2) the term "deceased partner's distributive share" includes
the share of his estate or of any other person succeeding, by
reason of his death, to rights with respect to his partnership
interest.
(g) Members of certain religious faiths
(1) Exemption
Any individual may file an application (in such form and
manner, and with such official, as may be prescribed by
regulations under this chapter) for an exemption from the tax
imposed by this chapter if he is a member of a recognized
religious sect or division thereof and is an adherent of
established tenets or teachings of such sect or division by
reason of which he is conscientiously opposed to acceptance of
the benefits of any private or public insurance which makes
payments in the event of death, disability, old-age, or
retirement or makes payments toward the cost of, or provides
services for, medical care (including the benefits of any
insurance system established by the Social Security Act). Such
exemption may be granted only if the application contains or is
accompanied by -
(A) such evidence of such individual's membership in, and
adherence to the tenets or teachings of, the sect or division
thereof as the Secretary may require for purposes of
determining such individual's compliance with the preceding
sentence, and
(B) his waiver of all benefits and other payments under
titles II and XVIII of the Social Security Act on the basis of
his wages and self-employment income as well as all such
benefits and other payments to him on the basis of the wages
and self-employment income of any other person,
and only if the Commissioner of Social Security finds that -
(C) such sect or division thereof has the established tenets
or teachings referred to in the preceding sentence,
(D) it is the practice, and has been for a period of time
which he deems to be substantial, for members of such sect or
division thereof to make provision for their dependent members
which in his judgment is reasonable in view of their general
level of living, and
(E) such sect or division thereof has been in existence at
all times since December 31, 1950.
An exemption may not be granted to any individual if any benefit
or other payment referred to in subparagraph (B) became payable
(or, but for section 203 or 222(b) of the Social Security Act,
would have become payable) at or before the time of the filing of
such waiver.
(2) Period for which exemption effective
An exemption granted to any individual pursuant to this
subsection shall apply with respect to all taxable years
beginning after December 31, 1950, except that such exemption
shall not apply for any taxable year -
(A) beginning (i) before the taxable year in which such
individual first met the requirements of the first sentence of
paragraph (1), or (ii) before the time as of which the
Commissioner of Social Security finds that the sect or division
thereof of which such individual is a member met the
requirements of subparagraphs (C) and (D), or
(B) ending (i) after the time such individual ceases to meet
the requirements of the first sentence of paragraph (1), or
(ii) after the time as of which the Commissioner of Social
Security finds that the sect or division thereof of which he is
a member ceases to meet the requirements of subparagraph (C) or
(D).
(3) Subsection to apply to certain church employees
This subsection shall apply with respect to services which are
described in subparagraph (B) of section 3121(b)(8) (and are not
described in subparagraph (A) of such section).
(h) Regular basis
An individual shall be deemed to be self-employed on a regular
basis in a taxable year, or to be a member of a partnership on a
regular basis in such year, if he had net earnings from self-
employment, as defined in the first sentence of subsection (a), of
not less than $400 in at least two of the three consecutive taxable
years immediately preceding such taxable year from trades or
businesses carried on by such individual or such partnership.
(i) Special rules for options and commodities dealers
(1) In general
Notwithstanding subsection (a)(3)(A), in determining the net
earnings from self-employment of any options dealer or
commodities dealer, there shall not be excluded any gain or loss
(in the normal course of the taxpayer's activity of dealing in or
trading section 1256 contracts) from section 1256 contracts or
property related to such contracts.
(2) Definitions
For purposes of this subsection -
(A) Options dealer
The term "options dealer" has the meaning given such term by
section 1256(g)(8).
(B) Commodities dealer
The term "commodities dealer" means a person who is actively
engaged in trading section 1256 contracts and is registered
with a domestic board of trade which is designated as a
contract market by the Commodities Futures Trading Commission.
(C) Section 1256 contracts
The term "section 1256 contract" has the meaning given to
such term by section 1256(b).
(j) Special rules for certain church employee income
(1) Computation of net earnings
In applying subsection (a) -
(A) church employee income shall not be reduced by any
deduction;
(B) church employee income and deductions attributable to
such income shall not be taken into account in determining the
amount of other net earnings from self-employment.
(2) Computation of self-employment income
(A) Separate application of subsection (b)(2)
Paragraph (2) of subsection (b) shall be applied separately -

(i) to church employee income, and
(ii) to other net earnings from self-employment.
(B) $100 floor
In applying paragraph (2) of subsection (b) to church
employee income, "$100" shall be substituted for "$400".
(3) Coordination with subsection (a)(12)
Paragraph (1) shall not apply to any amount allowable as a
deduction under subsection (a)(12), and paragraph (1) shall be
applied before determining the amount so allowable.
(4) Church employee income defined
For purposes of this section, the term "church employee income"
means gross income for services which are described in section
3121(b)(8)(B) (and are not described in section 3121(b)(8)(A)).
(k) Codification of treatment of certain termination payments
received by former insurance salesmen
Nothing in subsection (a) shall be construed as including in the
net earnings from self-employment of an individual any amount
received during the taxable year from an insurance company on
account of services performed by such individual as an insurance
salesman for such company if -
(1) such amount is received after termination of such
individual's agreement to perform such services for such company,
(2) such individual performs no services for such company after
such termination and before the close of such taxable year,
(3) such individual enters into a covenant not to compete
against such company which applies to at least the 1-year period
beginning on the date of such termination, and
(4) the amount of such payment -
(A) depends primarily on policies sold by or credited to the
account of such individual during the last year of such
agreement or the extent to which such policies remain in force
for some period after such termination, or both, and
(B) does not depend to any extent on length of service or
overall earnings from services performed for such company
(without regard to whether eligibility for payment depends on
length of service).