Code C in Box 14 of Schedule K-1 (Form 1065) reports your share of the partnership’s gross nonfarm income. It is not the number that determines your self-employment tax. That job belongs to Code A in the same box. Code C sits on your K-1 for a single, narrow reason: it feeds an optional calculation on Schedule SE, Part II, that a small group of partners with low net profits can use to shore up their Social Security record. If you don’t qualify for that method, Code C is informational and you can leave it out of your Schedule SE math.
What Code C Reports
Box 14 is the self-employment section of the K-1, and it can carry up to three amounts:
- Code A — your share of the partnership’s net earnings or loss from self-employment. This is the figure you carry to Schedule SE for the standard self-employment tax calculation.1Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025) – Section: Box 14. Self-Employment Earnings (Loss)
- Code B — gross farming or fishing income, used only if the partnership operates a farm or fishing business. It feeds a separate farm optional method.
- Code C — your share of the partnership’s gross income from nonfarm trade or business activity, before expenses. You use this figure only if you qualify for the nonfarm optional method on Schedule SE, Part II.1Internal Revenue Service. Partner’s Instructions for Schedule K-1 (Form 1065) (2025) – Section: Box 14. Self-Employment Earnings (Loss)
The partnership computes all three and reports whichever codes apply. Most active partners see both Code A and Code C.
Why Code C Is Not Your Self-Employment Tax Number
The most common mistake with Code C is treating it as your self-employment income. It isn’t. Code C is a gross figure. It shows the partnership’s total nonfarm business revenue attributable to your share, before subtracting the ordinary expenses of running the business.
Code A is what you actually owe self-employment tax on. It reflects your share of the partnership’s active trade or business income after expenses, and it strips out categories that the tax code does not treat as self-employment earnings: dividends, interest, and most royalties; rental income from real estate unless the partnership is a real estate dealer or provides substantial services; and capital gains and losses from business property sales.2Office of the Law Revision Counsel. 26 USC 1402 – Definitions3Internal Revenue Service. Instructions for Form 1065 (2025) – Section: Self-Employment
So if you glance at Box 14, see the larger Code C number, and enter it on Schedule SE, you will substantially overstate your self-employment tax. Start with Code A. Use Code C only if the situation described below applies to you.
When Code C Actually Matters: The Nonfarm Optional Method
Code C exists because of an alternative calculation in Part II of Schedule SE called the nonfarm optional method. The method lets you report a higher amount of self-employment earnings than you actually netted — which sounds backwards until you understand the point of it. Paying a little more self-employment tax now buys Social Security credits you would otherwise lose in a low-profit year.
Who Qualifies
You can use the nonfarm optional method only if all of the following are true:4Internal Revenue Service. Instructions for Schedule SE (Form 1040)
- Your net nonfarm profits (Code A) were less than $7,840.
- Your net nonfarm profits were also less than 72.189% of your gross nonfarm income (Code C).
- You were regularly self-employed — meaning your actual net self-employment earnings hit at least $400 in two of the three preceding tax years.
- You have not already used the nonfarm optional method for five prior tax years. There is a lifetime cap of five.
How the Calculation Works
If you qualify, you report two-thirds of your Code C gross nonfarm income as your net earnings from self-employment, subject to a statutory ceiling. That reported amount then runs through the normal Schedule SE math: multiplied by 92.35% and taxed at 15.3% (12.4% Social Security up to the wage base, 2.9% Medicare with no cap).5Internal Revenue Service. 2025 Schedule SE (Form 1040)6Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Because two-thirds of gross income will typically be larger than the low net profit that triggered your eligibility in the first place, you pay more self-employment tax than the standard method would produce. What you get in exchange is Social Security credits. In 2026, each $1,890 in covered self-employment earnings earns one credit, and $7,560 buys the maximum four credits for the year.7Social Security Administration. Social Security Credits You need 40 credits over your working life to qualify for retirement benefits, so a bad year that would otherwise leave you with zero credits can be worth the extra tax.
Save It for the Right Year
The five-year lifetime cap is the reason to be selective. If your partnership income is normally healthy and this year is just a rough patch, the method is worth using. If your profits are chronically low, burning through the five years early leaves you with no cushion later. Run the numbers before electing.
What to Do if You Don’t Qualify
Most partners don’t. If your Code A net earnings are above $7,840, or above 72.189% of your Code C gross, the nonfarm optional method is off the table and Code C has no role in your self-employment tax calculation. You take Code A to Schedule SE, apply the 92.35% adjustment, and compute the 12.4% Social Security portion (up to the 2026 wage base of $184,500) plus the 2.9% Medicare portion on the full amount.8Social Security Administration. Contribution and Benefit Base5Internal Revenue Service. 2025 Schedule SE (Form 1040) An additional 0.9% Medicare tax applies to self-employment earnings above $200,000 (single) or $250,000 (married filing jointly).6Internal Revenue Service. Self-Employment Tax (Social Security and Medicare Taxes)
Half of the resulting self-employment tax is deductible as an adjustment to income on Schedule 1, line 15. The total tax lands on Schedule 2, line 4.5Internal Revenue Service. 2025 Schedule SE (Form 1040) Code C stays on the K-1 as background information.
One Boundary: Limited Partners and LLC Members
Before assuming any of this applies, confirm that your Code A figure should exist at all. Under 26 USC 1402, a limited partner’s distributive share of income is excluded from self-employment earnings; only guaranteed payments for services performed remain subject to self-employment tax.2Office of the Law Revision Counsel. 26 USC 1402 – Definitions For a state-law limited partner who does not work in the business, Box 14 Code A should reflect guaranteed payments only, and the nonfarm optional method question is largely moot.
LLC members occupy a genuinely unsettled area of the law. The statute was written around traditional limited partnerships, and courts have split on how it applies to LLC members who actively manage the business. In 2025 the Tax Court held in Soroban Capital Partners that actively managing members were “limited partners in name only” and owed self-employment tax on their full distributive shares; shortly after, the Fifth Circuit went the other way, treating “limited partner” as anyone with limited liability under state law. If you’re an active LLC member, the conservative approach is to treat your distributive share as subject to self-employment tax, and this is a good place to spend money on professional advice rather than guess.