42 U.S.C. § 411 : US Code - Section 411: Definitions relating to self-employment

Search 42 U.S.C. § 411 : US Code - Section 411: Definitions relating to self-employment

For the purposes of this subchapter -
(a) Net earnings from self-employment
The term "net earnings from self-employment" means the gross
income, as computed under subtitle A of the Internal Revenue Code
of 1986, derived by an individual from any trade or business
carried on by such individual, less the deductions allowed under
such subtitle which are attributable to such trade or business,
plus his distributive share (whether or not distributed) of the
ordinary net income or loss, as computed under section 702(a)(8) of
such Code, 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
net 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 under subtitle A of the Internal Revenue Code of 1986
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 of the Internal Revenue Code of 1986
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 of the Internal Revenue Code of 1986 shall not be allowed;
(5)(A) If 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;
(B) If any portion of a partner's distributive share of the
ordinary net 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 the Commonwealth 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 the provisions
of section 933 of the Internal Revenue Code of 1986;
(7) 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) of this
section 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 earned income from sources without the United
States) of the Internal Revenue Code of 1986, but shall not
include in any such net earnings from self-employment the rental
value of any parsonage or any parsonage allowance (whether or not
excluded under section 107 of the Internal Revenue Code of 1986)
provided after the individual retires, or any other retirement
benefit received by such individual from a church plan (as
defined in section 414(e) of such Code) after the individual
retires;
(8) The exclusion from gross income provided by section 931 of
the Internal Revenue Code of 1986 shall not apply;
(9) 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 of the Treasury
or his delegate, 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);
(10) The exclusion from gross income provided by section
911(a)(1) of the Internal Revenue Code of 1986 shall not apply;
(11) In lieu of the deduction provided by section 164(f) of the
Internal Revenue Code of 1986 (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 of such Code for such year;
(12) 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) of the Internal
Revenue Code of 1986 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;
(13) In the case of church employee income, the special rules
of subsection (i)(1) of this section shall apply;
(14) There shall be excluded income excluded from taxation
under section 7873 of the Internal Revenue Code of 1986 (relating
to income derived by Indians from exercise of fishing rights);
and
(15) The deduction under section 162(l) of the Internal Revenue
Code of 1986 (relating to health insurance costs of self-employed
individuals) 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
upon the ordinary net income or loss of the partnership for any
taxable year of the partnership (even though beginning prior to
1951) 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 410(f) of this
title -
(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) of the
Internal Revenue Code of 1986 applies) is not more than $2,400,
his distributive share of income described in section 702(a)(8)
of such Code 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) of the
Internal Revenue Code of 1986 applies) is more than $2,400 and
his distributive share (whether or not distributed) of income
described in section 702(a)(8) of such Code 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 such 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 (6) and paragraph (8) 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 (6) and paragraph (8) 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 (g) of
this section, or by a partnership of which an individual is a
member on a regular basis as defined in subsection (g) of this
section, but only if such individual's net earnings from self-
employment in the taxable year as determined without regard to
this sentence 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
433 of this title) during any taxable year beginning after 1950;
except that such term shall not include -
(1) That part of the net earnings from self-employment which is
in excess of -
(A) For any taxable year ending prior to 1955, (i) $3,600,
minus (ii) the amount of the wages paid to such individual
during the taxable year; and
(B) For any taxable year ending after 1954 and prior to 1959,
(i) $4,200, minus (ii) the amount of the wages paid to such
individual during the taxable year; and
(C) For any taxable year ending after 1958 and prior to 1966,
(i) $4,800, minus (ii) the amount of the wages paid to such
individual during the taxable year; and
(D) For any taxable year ending after 1965 and prior to 1968,
(i) $6,600, minus (ii) the amount of the wages paid to such
individual during the taxable year; and
(E) For any taxable year ending after 1967 and beginning
prior to 1972, (i) $7,800, minus (ii) the amount of the wages
paid to such individual during the taxable year; and
(F) For any taxable year beginning after 1971 and prior to
1973, (i) $9,000, minus (ii) the amount of the wages paid to
such individual during the taxable year; and
(G) For any taxable year beginning after 1972 and prior to
1974, (i) $10,800, minus (ii) the amount of the wages paid to
such individual during the taxable year; and
(H) For any taxable year beginning after 1973 and prior to
1975, (i) $13,200, minus (ii) the amount of the wages paid to
such individual during the taxable year; and
(I) For any taxable year beginning in any calendar year after
1974, (i) an amount equal to the contribution and benefit base
(as determined under section 430 of this title) which is
effective for such calendar year, minus (ii) the amount of the
wages paid to such individual during such taxable year; or
(2) The net earnings from self-employment, if such net earnings
for the taxable year are less than $400.
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 the purpose of this
subsection, be considered to be a nonresident alien individual. In
the case of church employee income, the special rules of subsection
(i)(2) of this section 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 of the Internal
Revenue Code of 1986, 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 418 of this
title;
(2) The performance of service by an individual as an employee,
other than -
(A) service described in section 410(a)(14)(B) of this title
performed by an individual who has attained the age of
eighteen,
(B) service described in section 410(a)(16) of this title,
(C) service described in section 410(a) (11), (12), or (15)
of this title performed in the United States by a citizen of
the United States, except service which constitutes
"employment" under section 410(r) of this title,
(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 418 of this title,
(F) service described in section 410(a)(20) of this title,
and
(G) service described in section 410(a)(8)(B) of this title;
(3) The performance of service by an individual as an employee
or employee representative as defined in section 3231 of the
Internal Revenue Code of 1986;
(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 section 1402(g) of the
Internal Revenue Code of 1986 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 section 1402(e) of the
Internal Revenue Code of 1986 is effective with respect to him.
(d) Partnership and partner
The term "partnership" and the term "partner" shall have the same
meaning as when used in subchapter K of chapter 1 of the Internal
Revenue Code of 1986.
(e) Taxable year
The term "taxable year" shall have the same meaning as when used
in subtitle A of the Internal Revenue Code of 1986; and the taxable
year of any individual shall be a calendar year unless he has a
different taxable year for the purposes of subtitle A of such Code,
in which case his taxable year for the purposes of this subchapter
shall be the same as his taxable year under such subtitle A.
(f) Partner's taxable year ending as 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) 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
this section, 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.
(h) Option dealers and commodity dealers
(1) In determining the net earnings from self-employment of any
options dealer or commodities dealer -
(A) notwithstanding subsection (a)(3)(A) of this section, 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, and
(B) the deduction provided by section 1202 of the Internal
Revenue Code of 1986 shall not apply.
(2) For purposes of this subsection -
(A) The term "options dealer" has the meaning given such term
by section 1256(g)(8) of such Code.
(B) 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) The term "section 1256 contracts" has the meaning given to
such term by section 1256(b) of such Code.
(i) Church employee income
(1) In applying subsection (a) of this section -
(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)(A) Subsection (b)(2) of this section shall be applied
separately -
(i) to church employee income, and
(ii) to other net earnings from self-employment.
(B) In applying subsection (b)(2) of this section to church
employee income, "$100" shall be substituted for "$400".
(3) Paragraph (1) shall not apply to any amount allowable as a
deduction under subsection (a)(11) of this section, and paragraph
(1) shall be applied before determining the amount so allowable.
(4) For purposes of this section, the term "church employee
income" means gross income for services which are described in
section 410(a)(8)(B) of this title (and are not described in
section 410(a)(8)(A) of this title).
(j) Codification of treatment of certain termination payments
received by former insurance salesmen
Nothing in subsection (a) of this section 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).