Is my income subject to self employment tax?

Other Income Not Subject to Self Employment Tax

Occasional sources of income, such as a one-time transaction, do not count as trade or business income under the rules of the IRS, as the activity does not occur regularly or frequently. In addition, there is no effort to continue the activity on a consistent basis. Some examples of situations in which a taxpayer may have income that is not considered trade or business income:

Participation in a drug trial or clinical study that paid one time.

Hobbies that include creation and patenting of inventions, when done occasionally.

Occasional leasing of a commercial permit to another party with intention to return to using the permit when able.

Negotiation fees paid one time to a taxpayer for assisting in a single sale.

Generally, the taxpayer should report income as "other income not subject to self employment tax" as long as the activity which generated the income is not regular and done so without intent to generate a profit on a long-term basis. Reporting occasional income as "other income not subject to self employment tax" on your tax return saves you from having to pay self employment tax, although any deductions you claim as expenses for the activity are limited by the actual amount of income you earned.

On eTax.com, non-trade and non-business activity which is not subject to self employment tax should be reported on Other Income Not Subject to Self Employment Tax sub-section located on the Income section.

Trade or Business Income Subject to Self Employment Tax

Outside of typical earnings as an employee, sometimes taxpayers will have additional forms of income reported on a Form 1099-NEC. These earnings can come from "trade or business" such as contracted work and are taxed under both income tax and 15.3% self employment tax.

A trade or business has been defined as "holding one's self out to others as engaged in the selling of goods or services." According to the IRS, a trade or business is "an activity carried on for a livelihood or in good faith to make a profit." In addition, the IRS states that trade or business activity must occur regular, frequently, and on a continuous basis.

This last stipulation is important. It is not necessary to generate a profit in order for the IRS to consider your activities to be trade or business related. However, you must have a good faith attempt at making a profit, and the activity must have the ability to turn a profit. Also, you must make a continual effort to expand the efforts of the business.

On eTax.com, trade and business activity which is subject to self employment tax should be reported on Business Income sub-section located on the Income section.