Specialized Returns and Taxpayers · Farmers

Farm tax computation (e.g., Schedule J, Schedule SE, estimated tax)

Two computations distinguish a farm return from any other Schedule C business, and they pull in opposite directions. The estimated tax rules are a concession, replacing four payments with one. The income averaging election is a relief, spreading a good year backwards across three. Between them sits self-employment taxself-employment taxThe Social Security and Medicare tax a self-employed person pays directly, covering both the employee share and the employer share that a wage earner would otherwise split with an employer., which is computed the ordinary way but on an income figure that can swing violently from year to year.

The rule

Who is a farmer for this purpose (IRC § 6654(i)(2)). an individual is a farmer or fisherman for a taxable year if gross income from farming or fishing, including oyster farming, is at least 66⅔ percent of total gross income from all sources for that year, or if the gross income from farming or fishing shown on the preceding year’s return is at least 66⅔ percent of total gross income shown on that return (IRC § 6654(i)(2))^TY2026Verified 2026-08-21IRC § 6654(i), read at law.cornell.edu/uscode/text/26/6654 The test is gross income, not net, and it can be met on either the current year or the preceding year — a farmer who has one bad year does not lose the concession.

One payment, not four. a farmer or fisherman has only one required estimated tax installment for the year, due 15 January of the following year, in an amount equal to the required annual payment under IRC § 6654(d)(1)(B) computed by substituting 66⅔ percent for 90 percent and disregarding the prior-year safe harbour of IRC § 6654(d)(1)(C) (IRC § 6654(i)(1)(A)-(C))^TY2026Verified 2026-08-21IRC § 6654(i), read at law.cornell.edu/uscode/text/26/6654 the general rule at IRC § 6654(h) — that no addition to tax arises on the fourth required installment where the taxpayer files the return and pays in full by 31 January of the following year — is applied for a farmer or fisherman by substituting 1 March for 31 January, treating the single installment as the fourth (IRC § 6654(i)(1)(D))^TY2026Verified 2026-08-21IRC § 6654(i), read at law.cornell.edu/uscode/text/26/6654 The 1 March route is not an extension of the 15 January installment; it is a separate way of avoiding the addition to tax altogether, by filing the return and paying in full.

And what it costs. the ordinary prior-year safe harbour of IRC § 6654(d)(1)(C), which lets a taxpayer pay 100 or 110 percent of last year’s tax, is expressly disregarded for a farmer or fisherman — the single installment is measured against 66⅔ percent of the current year’s tax (IRC § 6654(i)(1)(C))^TY2026Verified 2026-08-21IRC § 6654(i), read at law.cornell.edu/uscode/text/26/6654 That is the trade. Everyone else may pay 100 percent of last year’s tax and be safe whatever this year brings. A farmer must estimate the current year to within a third.

Averaging a good year. an individual engaged in a farming or fishing business may elect to compute the IRC § 1 tax as the sum of the tax on taxable income reduced by elected farm income, plus the increase in tax that would result if taxable income for each of the 3 prior years were increased by one third of the elected farm income; an adjustment for one year is taken into account in applying the section in later years (IRC § 1301(a))^TY2026Verified 2026-08-21IRC § 1301, read at law.cornell.edu/uscode/text/26/1301 elected farm income is so much of the year’s taxable income as is attributable to a farming or fishing business and is specified in the election; gain from the sale or other disposition of property other than land, regularly used in that business for a substantial period, is treated as attributable to it (IRC § 1301(b)(1))^TY2026Verified 2026-08-21IRC § 1301, read at law.cornell.edu/uscode/text/26/1301 individual for this purpose excludes an estate or trust; farming business takes its IRC § 263A(e)(4) meaning; and fishing business means commercial fishing as defined in the Magnuson-Stevens Fishery Conservation and Management Act (IRC § 1301(b)(2)-(4))^TY2026Verified 2026-08-21IRC § 1301, read at law.cornell.edu/uscode/text/26/1301 The election does not amend the three prior years; it computes a hypothetical increase in those years’ tax and adds it to the current year’s liability. The prior returns are untouched.

Self-employment tax. gross income from any trade or business carried on by the individual, less the deductions attributable to it, plus the distributive share of income or loss described in IRC § 702(a)(8) from a partnership of which the individual is a member^TY2026Verified 2026-08-19IRC § 1402(a), opening text — https://www.law.cornell.edu/uscode/text/26/1402 12.4 percent for old-age, survivors and disability insurance and 2.9 percent for hospital insurance, plus an additional 0.9 percent on self-employment income above the threshold^TY2026Verified 2026-08-19IRC § 1401(a), (b)(1), (b)(2)(A) — https://www.law.cornell.edu/uscode/text/26/1401 $184,500 for 2026 — the old-age portion applies only to net earnings up to the contribution and benefit base under section 230 of the Social Security Act, reduced by wages paid to the individual in the year, while the hospital insurance portion has no ceiling^TY2026Verified 2026-08-19IRC § 1402(b)(1) read at law.cornell.edu/uscode/text/26/1402, with the 2026 base at IRS Topic no. 751 (page last reviewed 20 January 2026) read at irs.gov/taxtopics/tc751 no self-employment income where net earnings from self-employment for the year are less than $400^TY2026Verified 2026-08-19IRC § 1402(b)(2) — https://www.law.cornell.edu/uscode/text/26/1402 one-half of the taxes imposed by IRC § 1401, other than the additional hospital insurance tax under § 1401(b)(2), deducted in computing adjusted gross income and treated as attributable to a trade or business not consisting of services as an employee^TY2026Verified 2026-08-19IRC § 164(f)(1), (2) — https://www.law.cornell.edu/uscode/text/26/164 Schedule F net profit is net earnings from self-employment; a Form 4835 landlord’s income is not.

The optional method. two thirds of gross farm income where that income does not exceed the upper limit, or the lower limit where gross farm income exceeds the upper limit but net earnings fall below the lower limit — available for an unlimited number of years (IRC § 1402(a), clauses (i) and (ii) of the agricultural sentence)^TY2026Verified 2026-08-19IRC § 1402, read at law.cornell.edu/uscode/text/26/1402 set by IRC § 1402(l): the lower limit for a year is the sum of the amounts required under section 213(d) of the Social Security Act for a quarter of coverage for each calendar quarter in the year, and the upper limit is 150 percent of that — so both move with an SSA figure rather than with a Treasury inflation adjustment^TY2026Verified 2026-08-19IRC § 1402, read at law.cornell.edu/uscode/text/26/1402 the most recently published Schedule SE figures are for 2025: the farm optional method is available where gross farm income was $10,860 or less or net farm profits were under $7,840, and reports two thirds of gross farm income up to $7,240 — the 2026 instructions have not been issued, so no 2026 figure is stated here^TY2026Verified 2026-08-19Instructions for Schedule SE (Form 1040) (2025), page last reviewed 30 April 2026, read at irs.gov/instructions/i1040sse The farm optional method exists to let a farmer with a poor year still earn Social Security credits, and unlike the non-farm optional method it may be used for an unlimited number of years.

Losses do not run free. A farm’s bad year is limited twice over — by the excess business loss rule of IRC § 461(l) before it reaches other income, and by IRC § 172 once it becomes a net operating lossnet operating lossWhat results when a business's deductible expenses exceed its income for the year. The loss can generally be used to reduce taxable income in another year.. Both of those are general rules rather than farm rules, but they bite hardest on a business whose income is this volatile.

Current figures

How it works in practice

Test the two-thirds threshold on gross income and on both years before advising on payments. A farmer whose farm receipts are three quarters of total gross receipts is over the threshold even if the farm made a loss on net, and the preceding-year limb means a single atypical year does not cost the concession. Miss the threshold and the ordinary four-installment regime applies from the first quarter, retrospectively.

Choose deliberately between 15 January and 1 March. Paying a single installment on 15 January requires estimating the year’s tax to within two thirds, which is achievable for a farmer whose selling is done by December. Filing and paying in full by 1 March avoids the estimate entirely but requires a complete return in eight weeks, which for a farm with depreciation elections and inventory questions is tight. Where the year’s results are still uncertain in January, the 1 March route is usually the safer one — but it must be both filed and paid, not merely filed.

For income averaging, remember what the election actually does. It computes the tax as if one third of the elected farm income had been added to each of the three base years, then adds that increase to the tax on the reduced current-year income. Nothing is carried back and no prior return is amended, so the prior years’ credits, phase-outs and alternative minimum tax are recomputed only inside the calculation. The election is made on Schedule J and can be revisited by amending the current-year return, so a farmer who elects and later regrets it is not stuck.

Watch the interaction between averaging and self-employment tax: there is none. IRC § 1301 reduces the tax imposed by IRC § 1 only. Self-employment tax under IRC § 1401 is computed on the year’s actual net earnings regardless of the election, so a farmer averaging a large year still pays the full self-employment tax on it in that year.

How this has changed

Farm income averaging was reintroduced by the Taxpayer Relief Act of 1997 as a three-year election and made permanent shortly afterwards; the modern version at IRC § 1301 has been stable since. What changed materially was the interaction with the alternative minimum tax — averaging once could increase alternative minimum tax and claw back most of the benefit, and the American Jobs Creation Act of 2004 fixed that by keeping the averaging adjustment out of the alternative minimum tax computation.

The estimated tax structure at IRC § 6654(i) is older and has not moved, but the environment around it has. The 1 March filing route was comfortable when farm returns were simple; a modern return with depreciation elections, deferred livestock sale elections and IRC § 199A computations is a harder document to complete in eight weeks, so more farmers now make the January installment and accept the estimating risk.

The excess business loss limitation at IRC § 461(l) was suspended for 2018 through 2020 by the Coronavirus Aid, Relief, and Economic Security Act, restored, and then made permanent by Pub. L. 119-21 § 70601. Farm losses had a special two-year net operating loss carryback which was removed and partially restored during the same period; the current position is the general IRC § 172 rule with no farm-specific carryback.

Self-employment tax itself has not changed in structure, but the additional 0.9 percent hospital insurance tax added by the Patient Protection and Affordable Care Act in 2013 falls on farm earnings like any other, and unlike the old-age portion it has no ceiling.

Exam focus

Know the two-thirds test on gross income and that either the current or the preceding year satisfies it. Know the single installment, the 15 January date, the 66⅔ percent measure, and that the prior-year safe harbour is disregarded.

Know the 1 March alternative and that it requires both filing and payment. Expect a question giving a calendar-year farmer who made no estimated payments and asking the last date to pay without penalty.

Know what income averaging does and does not do: it recomputes the IRC § 1 tax using the three base years, does not amend them, and does not affect self-employment tax. Know that the farm optional method may be used without limit on the number of years.

Check yourself

1. A calendar-year farmer with all his income from farming made no estimated payments during 2026. What is the latest date he can pay without an addition to tax?

Answer: 1 March 2027 — but only if he also files the 2026 return by that date and pays in full the amount shown as payable. IRC § 6654(i)(1)(D) substitutes 1 March for the 31 January date in IRC § 6654(h) and treats the single farmer installment as the fourth required installment. Paying without filing does not work.

2. A farmer’s 2025 tax was $60,000. Her 2026 tax will be about $95,000. She pays $60,000 on 15 January 2027. Is she protected?

Answer: No. IRC § 6654(i)(1)(C) computes the required installment by substituting 66⅔ percent for 90 percent in IRC § 6654(d)(1)(B) and without regard to IRC § 6654(d)(1)(C), which is the prior-year safe harbour. She needed 66⅔ percent of $95,000, or about $63,333. The $60,000 falls short and the addition to tax runs on the shortfall.

3. A farmer’s gross income for 2026 is $300,000, of which $150,000 is from farming. His 2025 return showed $280,000 of gross income with $220,000 from farming. Is he a farmer for estimated tax purposes in 2026?

Answer: Yes. The 2026 year alone fails — $150,000 of $300,000 is exactly half, below two thirds. But IRC § 6654(i)(2)(B) allows the test to be met on the preceding year’s return, and $220,000 of $280,000 is about 78.6 percent. Either limb suffices, so he keeps the single-installment treatment for 2026.

4. A farmer elects to average $150,000 of 2026 farm income. Her self-employment tax on the 2026 Schedule F profit is $22,000 before the election. What is it after?

Answer: $22,000. IRC § 1301(a) recomputes only “the tax imposed by section 1.” Self-employment tax is imposed by IRC § 1401 on the year’s actual net earnings and is untouched by the election, as are the additional Medicare tax and the net investment income tax.

5. A farmer has used the farm optional method in each of the last six years. May she use it again?

Answer: Yes. The farm optional method in IRC § 1402(a) has no limit on the number of years it may be used, which is the principal difference between it and the non-farm optional method, and it is available whenever gross farm income does not exceed the upper limit, or gross farm income exceeds that limit but net earnings fall below the lower limit.