TN 14 (05-14)

A. Introduction

Special provisions in the law provide farmers with an optional method of computing their earnings from farming for Social Security coverage purposes.

B. Policy for computing and using NE from farming

1. General computation methods

The farm optional method of computation is applicable to any individual whose trade or business is considered to be an agricultural enterprise. The farmer may report either actual net earnings from self-employment (NESE), or

• an amount equal to 2/3 of the farmer's gross farm income, provided the gross farm income does not exceed $6,960 (up to $4,640 NESE); or

• $4,640 if the farmer's gross income exceeds $6,960 but his actual NESE is less than $4,640.

• Effective with tax years after December 31, 2007, the maximum amount of income reportable using the optional method of reporting will be equal to the amount of earnings needed to acquire four quarters of coverage for a given tax year. See RS 00301.250 to determine the amount of earnings needed to acquire a quarter of coverage (QC) and/or the amount of earnings needed to acquire four QC’s for a given tax year or years effective with tax year 1977 and after. For example, for tax year 2013, the maximum amount of farm income reportable using the optional method of reporting is $6,960. Further, the maximum gross farm profit is increased to $6,960 and the maximum net farm profit is increased to $5,024. See the IRS Schedule SE Instructions and IRS Form Schedule SE in each tax year to obtain the current tax year threshold amounts. Currently, the IRS SE Instructions contain this information under the heading Farm Optional Method.

2. Farm option and non-farm business

When using the farm optional method, the NE from the farming operation must be combined with any NE (or loss) that is derived (or incurred) from the nonfarm business.

3. Combining multiple farm businesses

When the optional farm method is used, all the aggregate gross income from all farming activities must be used. The total gross and the total actual NE are deemed to be from one trade or business.

The farmer cannot use the optional method in one farm business and report the actual NE in the other.