The IRS generally considers all amounts in Block 7 to be nonemployee compensation subject to self-employment tax. That doesn't mean that it is, just that the Church, by placing the amount in Box 7, caused the IRS to think so.
To be self-employment income the service you performed must be performed with "continuity, regularity and the purpose is for income or profit". If so, it is self-employment income. If not, it is miscellaneous income similar to prizes and awards (and not subject to self-employment tax).
To give you an idea of how complicated the issue is, the Tax Court has considered it on several occasions. In one, Batok was a retired automobile mechanic. He assisted a company in installing office windows. He had never done that type work before. The work lasted for one month.
The IRS asserted the income was self-employment income. They lost in the US Tax Court. From the decision:
"Generally, to be engaged in a trade or business, the taxpayer must be involved in the activity with continuity, regularity, and the taxpayer's purpose must be for income or profit. A sporadic activity, hobby, or amusement does not qualify. Commissioner v. Groetzinger [87-1 USTC - 9191], 480 U.S. 23, 35 (1987). The Supreme Court has further stated that whether a taxpayer is engaged in a trade or business is a question of fact. Higgins v. Commissioner [41-1 USTC - 9233], 312 U.S. 212, 217 (1941).
We believe that petitioner's installation of windows for M. David Paul does not rise to the level of a trade or business. Petitioner's activity, although engaged in for profit, was neither continuous nor regular. Petitioner had never installed windows prior thereto nor at any time thereafter. Rather, petitioner's activity was a "one-time job". Sloan v. Commissioner [Dec. 44,879(M)], T.C. Memo. 1988-294. Accordingly, petitioners are not liable for self-employment tax on the compensation received from M. David Paul."
Turbotax asks questions to determine if your situation is similar to that in Batok and others. If so, it reports the income as miscellaneous income not subject to self-employment tax. Unfortunately, as noted above, the IRS takes a rigid approach and proposes in almost all cases that Box 7 is self-employment income.
That leaves the taxpayer in the middle. If, for example, the work you did for the Church only took several days and you are retired or in some other business, you can reply to the IRS giving them the facts and circumstances, and try to convince them this is not self-employment income.
