Treatment of Self-Employment Income 415-25-05-27-15

(Revised 10/1/14 ML# 3407)

View Archives

IM 5229

When an individual is actively engaged in a self-employment business, the income they receive is considered earned income. The following types of income are always considered earned income:

• Capital or Ordinary Gains/Losses
• Farm Income
• Business Income
• Partnership – Ordinary income, guaranteed payments to partners, depreciation and depletion

However, there are some types of income included on the self-employment income tax forms that are considered unearned income. The following types of income are always considered unearned income:

• Royalty income
• Cooperative distributions (patronage dividends)
• Partnership – rental, interest and dividend income
• Income from S-Corporations
• Estate or trust income

The following types are considered earned or unearned depending on whether the individual is actively engaged in earning the income and the self-employment tax forms filed.

• Farm rental income
• Other rental income

The earned income must be separated from the unearned income and will be when using the self-employment calculation worksheet.