======Net Earnings from Self-Employment======
Net Earnings from Self-Employment is the profit or loss from a trade or business you operate yourself, either as a sole proprietor, an independent contractor, or a partner in a partnership. Think of it as the business's "take-home pay" before you, the owner, pay any personal income taxes. This figure is the bedrock of a self-employed individual's financial life, as it determines not only how much tax is owed but also how much can be saved for retirement. The [[Internal Revenue Service (IRS)]] in the U.S. and similar tax authorities in Europe have specific rules for calculating this number, which generally involves subtracting the ordinary and necessary costs of running your business from the total revenue you brought in. For anyone who is their own boss, from a freelance graphic designer to a corner-store owner, understanding this concept is non-negotiable. It's the starting point for both tax compliance and strategic wealth building.
===== How It's Calculated =====
At its heart, the calculation is beautifully simple, though the details can get a bit hairy. The basic formula is:
**Total Business Revenue - Allowable [[Business Expenses]] = Net Earnings from Self-Employment**
This calculation is typically done on a specific tax form, such as the [[Schedule C (Profit or Loss from Business)]] in the United States.
==== What Counts as Revenue and Expenses? ====
  * **Revenue (or [[Gross Income]]):** This is all the income generated by your business activities. It includes payments for services, sales of products, and any other income your business earns.
  * **Business Expenses:** These are the costs you incur to keep your business running. The key is that they must be both "ordinary" (common and accepted in your trade) and "necessary" (helpful and appropriate for your business). Common examples include:
    * Office supplies and software subscriptions
    * Business-related travel and vehicle mileage
    * Rent for your office or storefront
    * The home office deduction (if you qualify)
    * Advertising and marketing costs
    * Health insurance premiums (often deductible)
Getting this calculation right is crucial. Overlooking legitimate expenses means you'll overstate your earnings and pay more tax than necessary.
===== Why It Matters to Investors =====
For the savvy investor, particularly one following a value investing philosophy, this number is more than just a box on a tax form. It's a key indicator of financial health and opportunity.
==== Fueling Your Retirement Engine ====
This is the most direct impact on your personal investment portfolio. The amount of your Net Earnings from Self-Employment dictates the maximum contribution you can make to powerful retirement accounts designed for the self-employed, such as a [[SEP IRA]] or a [[Solo 401(k)]].
//For example//, the contribution limit for a SEP IRA is typically up to 25% of your net adjusted self-employment income (a slightly modified version of your net earnings). A higher net earnings figure means a higher contribution limit, allowing you to turbo-charge your tax-deferred savings and accelerate your journey to financial independence. This transforms a tax concept into a primary tool for wealth creation.
==== A Window into Small Business Analysis ====
When a value investor analyzes a small, publicly traded company, especially one where the founder is still heavily involved, understanding the principle of net earnings is vital. It provides a framework for estimating the true earning power of the business, a concept [[Warren Buffett]] calls [[Owner Earnings]]. By looking past the reported accounting profits and trying to calculate what a hypothetical owner could truly pocket from the business each year, you get a much clearer picture of its intrinsic value. Net Earnings from Self-Employment is the real-world, small-scale version of this powerful analytical concept.
===== The Tax Man Cometh: The Self-Employment Tax =====
The primary reason tax authorities care so much about this number is for calculating the [[Self-Employment Tax]]. This is the self-employed person's version of the FICA taxes that employees and employers split. It covers your contributions to [[Social Security]] and [[Medicare]].
Here's a crucial quirk in the U.S. system:
  - You don't actually pay self-employment tax on 100% of your net earnings.
  - You first multiply your net earnings by **92.35%**. The result is the amount subject to self-employment tax.
Why the odd percentage? It's the government's way of giving you a break equivalent to the half of FICA taxes that a traditional employer would pay on your behalf. To level the playing field, you only pay tax on the "employee" portion. As a final bonus, you get to deduct one-half of your total self-employment tax bill from your [[Adjusted Gross Income (AGI)]], which lowers your overall income tax liability.