@ydst wrote:
Thanks for answering my question. You are right. It ends up on Sch1 line 8. I think it's due to I chose "This is not money earned as employee or self-employed individual, it is from an sporadic activity or hobby."
It is for one time consultancy and I have another full time job. I'm not sure I belongs to self-employed individual.
Yes, that's it. You reported it as "other income" instead of self-employment.
There's a lot of guidance on whether your side-income is a hobby or self-employment, you can start here.
https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business
Very briefly, you are self-employed if you are engaged in an "ongoing trade or business" with a profit motive. There are a number of factors the IRS will use to make this determination, such as regularity, similarity to your "regular" job, and so on. You said "one time consultancy." If you performed a service (consulting) and you did it for money, then it should probably be considered self-employment.
With self-employment, you can deduct ordinary and necessary expenses, and then you pay income tax and SE tax on the profit. With a hobby, you can't deduct expenses, so you pay income tax on the gross proceeds, but you don't pay SE tax.
Your options now are to:
a. prepare an amended return declaring the money as self-employment. Deduct any expenses, and calculate your net profit and any extra tax due. Send the amended return and a check to the IRS office that sent the notice, along with a letter of explanation.
b. If you have no expenses to deduct, then you can just follow the instructions in the letter to pay the assessed SE tax.
c. Write a letter to the IRS explaining that, based on the tests the IRS uses, this is not self-employment income.
