Methods for Computing Self-Employment Tax (continued)

Regular Method Step 1: Determine Net Profit

To start the first step, determine net profit from self-employment, and identify income, expenses, and deductions that can be used in self-employment tax computations.

All allowable deductions, including depreciation, must be claimed. Net profit from self-employment normally includes all of the items of business income and deductions allowed for Puerto Rico income tax purposes.

Some deductions and exemptions are not included when computing self-employment tax. Do not include:

• Any net operating loss deductions
• Nonbusiness deductions (i.e. itemized deductions)
• Insurance premiums paid that cover the taxpayers' medical care expenses
• One-half of self-employment tax as a deduction
• Business expense contributions made to a simplified employee pension for the taxpayer

Taxpayers with multiple trades or businesses combine the net earnings from all of them to compute their net earnings from self-employment. A loss in one business reduces the income earned in another.

NOTE: Making false statements to get or increase Social Security benefits may subject the taxpayer to penalties. Although taxpayers who overpay taxes are rarely assessed penalties, the Social Security Administration may deny benefits to taxpayers who cannot prove they were engaged in a trade or business.