self-employed individuals and net earned income calculation

[Guest MES]

We are trying to calculate a sole proprietor's net earned income. Our problem is the starting point. We have been told to use Schedule C line 31 (for a sole proprietor). We have then been given some conflicting information with regard to adjustments to arrive at the final earned income number. Does anyone have any information they can share with regard to this calculation? We deal with mostly 401(k) plans, so it complicates the issue. Any help would be appreciated.

[Mary Kay Foss]

You start with the Schedule C profit and reduce it by the deduction claimed for one-half of self employment tax. The amount is shown on Line 27 page one of the return and is calculated on Schedule SE.

The self-employment tax is calculated on 92.35% of Schedule C profit and is affected by the social security wage base and whether the individual has any social security wages.

Even inexpensive tax-planning software is able to calculate the correct amount but it isn't at all intuitive.