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Net SE income usually includes all business income less all business deductions allowed for income tax purposes.

You must determine your net income from self-employment by using the same accounting method you use for income tax purposes. You must claim all allowable deductions when figuring net SE income. Your net SE income is used to figure your net earnings from self-employment.

Your net SE income is shown on line 31 of Schedule C (Form 1040), line 3 of Schedule C-EZ (Form 1040), line 36 of Schedule F (Form 1040), and line 14 of Schedule K-1 (Form 1065).

More than one business. If you have more than one trade or business, you must combine the net income from each business to determine your net SE income. A loss you incur in one business will reduce your gain in another business. Net these gains and losses for purposes of the SE tax. Keep separate records for each business and file the appropriate form or schedule for each separate business.

Example. You are the sole proprietor of two separate businesses. You operate a restaurant that made a net profit of $25,000 last year. You also have a cabinet making business that had a net loss of $500 last year. You file Schedule SE showing net SE income of $24,500. You must also file a Schedule C for each business--a Schedule C for the restaurant showing your net profit of $25,000, and another Schedule C for the cabinet making business showing your net loss of $500.

Church employee. If you are an employee of a church or church-related organization that elected exemption from social security and Medicare taxes, your net SE income is the gross income you received for your services, without any deductions.

Deductions and exemptions. Your SE income should not be reduced by certain deductions you used to figure income tax. Specifically, do not use:

• Deductions for personal exemptions for yourself, your spouse, or dependents.
• The standard deduction or itemized deductions.
• The net operating loss deduction.
• Non-business deductions including contributions on your behalf to a pension, profit-sharing, annuity plan, Keogh or SEP plan.
• The self-employed health insurance deduction.

For more information on the Self-Employment Tax, see other topics under this heading. Also, see IRS publication No. 533

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