How to know if you owe self-employment taxes on one-time income

How to know if you owe self-employment taxes
Many of you have most likely heard of self-employment taxes. What about income that you collect occasionally or one-time?  Let’s dive into when you DON’T owe self-employment taxes.
If you’re not familiar with self-employment taxes, then I highly suggest you learn about them as a freelancer or business owner. The IRS even has a tool to help you figure out if your income is subject to self-employment taxes or not.

Self-employment taxes

As a quick review, self-employment taxes are Social Security and Medicare taxes on your small business income. They equal 15.3% which are comprised of 2.9% for Medicare and 12.4% for Social Security.
Chances are if you’re self-employed, you already know this info and hopefully, you plan for it. You also most likely pay quarterly estimated tax payments to avoid an underpayment penalty. As a self-employed individual, it’s part of the cost of doing business.
But what about random non-employee income that’s only collected on a one-time basis or occasionally?

When you don’t owe self-employment taxes

The IRS might have you believe that you owe self-employment taxes on all 1099-Misc income. However, in order to owe self-employment taxes, you must engage in a trade or business. That’s the IRS definition.
This means any activity that you conduct with continuity and regularity and with a profit motive means you’re self-employed. A trade or business is generally any activity carried on for the production of income from selling goods or performing services.
Isolated or random activity in NOT subject to self-employment taxes.
Yes.
You can rejoice for a minute!
Isolated or one-time income does not constitute a trade or business. Let’s look at some examples.
Example 1: A side-gig is related to your regular business

You are a photographer. You typically photograph landscapes and sell your photos online. However, a friend asks if you will photograph their wedding. The friend pays you $5,000 for this side-gig. In this case, your side-gig is related to your regular business income and should be included in income. This means you also need to pay self-employment taxes on that income.

Example 2: A side-gig is unrelated to your regular business

You are a software engineer. You work contracts for different clients and report your income as a business on a Schedule C as part of your Form 1040. However, you’re also a hobby photographer and a friend asks if you will photograph their wedding. The friend pays you $5,000 for this work.

In this case, the extra income is NOT related to your regular business and you are not in the business of photography. I would consider this money extra income and report it as such on your Form 1040. Other income goes on line 21 of Form 1040, Schedule 1 (Other Income and Adjustments to Income). You may owe state income tax too. This extra income would NOT be subject to self-employment taxes.

Example 3: A side-gig is unrelated to your regular W-2 job

You are a software engineer and work for a company as a W-2 remote employee. You don’t have a business at all so you’re not considered to be self-employed. However, you’re also a hobby photographer and a friend asks if you will photograph their wedding. The friend pays you $5,000 for this work.

In this case, you are not in the business of photography. It is a one-time job. I would consider this money extra income and report it as such on your Form 1040. Other income goes on line 21 of Form 1040, Schedule 1 (Other Income and Adjustments to Income). This also means the extra income would NOT be subject to self-employment taxes.

Income vs. self-employment tax

Hopefully you now understand better when you don’t owe self-employment taxes on that extra income you earned this year. Let’s also remember that self-employment taxes are separate from income tax. Therefore, you will owe income tax on ALL income earned whether it’s business income or a one-time gig.

It’s also important to remember that if one-time income is not subject to self-employment taxes, you also can’t claim any expenses for earning that income. In the case of being a hobby photographer, this could mean losing out on the deduction for your camera gear, software, etc.

If you don’t plan on making the side-gig a regular thing, then it’s not that big a deal. However, if you think you’ll continue that side-gig, then it might be worth taking the expense deductions and making it officially a business.

The choice is ultimately yours, but you should be aware of your options. If you’re confused over any of this or wish to understand if you’ll save some money by taking expenses for that side-gig (essentially turning it into a business), then I encourage you to reach out to a tax professional for help.