What Is Self-Employment Income?

Man and woman sitting on floor of home doing work while drinking coffee

Roberto Westbrook / Getty Images

For some, calculating self-employment income is as easy as totaling up the amounts on their 1099-MISC forms, but for others, it's not that simple. And while you'll likely want to consult a tax specialist or the IRS about specific questions, this article goes over some of the basic points of self-employment income, so you can be more informed on your day-to-day business decisions.

Key Takeaways

  • Income earned as a sole proprietor, independent contractor, or as part of a partnership is considered self-employment income by the IRS.
  • Earnings for which you receive a W-2 are not considered self-employment income.
  • Add the amounts in Box 7, titled "Nonemployee Compensation" from the 1099 forms you receive to calculate your total self-employment income.

How the IRS Defines Self-Employment Income

Self-employment income is earned from executing a "trade or business" as a sole proprietor, an independent contractor, or some form of partnership. Freelancers and "gig workers" are also considered by the IRS to be self-employed. To be considered a trade or business, an activity does not necessarily have to be profitable, and you do not have to work at it full time, but profit must be your motive. For those who don't have profit as a motive, an activity could be considered a hobby and not a business. However, the IRS defines a hobby narrowly, so be sure you understand the rules regarding profits and losses from a hobby.

The Difference Between Self-Employment and Employment

The IRS considers many factors when differentiating between activities it considers employment and contracting. Employees, even if they work at home, are not only directed by their employers in what work should be done but also how and when to do it. Employees usually receive regular paychecks, payroll taxes are taken out, and the employer pays half of their Medicare and Social Security taxes. Employees must earn minimum wage and will receive a W-2 at tax time.

Independent contractors are not as closely supervised as employees, though they may work in an office. They often, but not always, receive work on a project basis and may or may not be paid hourly. Independent contractors are not subject to minimum wage laws, they pay all of their own Social Security and Medicare taxes, and they receive 1099-MISC, not a W-2.

Calculating Self-Employment Income

If you receive 1099 forms, tally up the totals in Box 7, titled "Nonemployee Compensation." You will only receive a 1099 form if you earned more than $600 from a company, but you'll still have to report all income less than that, so keep accurate financial records.

If you have a business that sells goods, you will need to calculate your gross income, which can be done by subtracting the cost of goods sold from revenue—taking into account returns and allowances. Keep accurate records and receipts to be sure you are accounting for all of your costs and sales. All of this is done on Schedule C.


Although most contractors will use Schedule C, farmers should use Schedule F to report their self-employment income and those engaged in a partnership should use Schedule K-1. After you've calculated your income, you will need Schedule SE to calculate the self-employment tax.

What Is Not Considered Self-Employment Income

Income for which you received a W-2—which would mean you are an employee—should not be calculated as self-employment income. The same goes for income received from an activity that fits the IRS' definition of a hobby. Income from dealing and brokering investment securities, interest, and dividends are also not considered self-employment income.

Frequently Asked Questions (FAQs)

What does the IRS consider self-employment income?

According to the IRS, any income that comes from the "performance of personal services, but cannot be classified as wages because an employer-employee relationship does not exist between the payer and the payee" is considered self-employment income. In other words, any earnings you make for which you do not receive a W-2 are considered self-employment income by the IRS.

Do you need to file self-employment taxes if you earned less than $600?

Yes, the IRS requires you to report all income from all sources during each calendar year regardless of how much you earned from each source. Businesses are only required to file Form 1099 if the contractor earns more than $600. However, you should maintain your own records to avoid being audited by the IRS.

Was this page helpful?
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Internal Revenue Service. "Self-Employed Individuals Tax Center."

  2. Internal Revenue Service. "Earning Side Income: Is It a Hobby or Business?"

  3. Internal Revenue Service. "Independent Contractor (Self-Employed) or Employee?"

  4. Internal Revenue Service. "Self-Employment Tax."

Related Articles