I was just reading the story on the tax changes for gamblers this year. That got me wondering, do professional gamblers have to file as self-employed? If so, then they would have to pay the FICA/Medicare taxes, plus the self-employment half on their net winnings?
Yes, that's exactly right.
Professional gamblers are generally treated as self-employed for federal tax purposes and that has exactly the consequences you’re asking about, with a few important nuances.
The IRS and courts look at whether gambling is a trade or business under the usual factors (regularity, continuity, profit motive, time devoted, records kept, etc.). If you qualify, you report your gambling income on Schedule C, Profit or Loss from Business, the IRS tax form used by sole proprietors, freelancers, and single-member LLCs to report their business income and claim deductible expenses.
Gambling income after business expenses, but before gambling losses, is subject to self-employment (SE) tax: Social Security tax (12.4%, up to the annual wage base) and Medicare tax (2.9%). That totals 15.3%, just like any other self-employed taxpayer. You can write-off half of the SE tax as an above-the-line deduction
The big wrinkle, as we've been discussing lately, is that professional gamblers are treated worse than almost any other self-employed individual. Gambling losses aren't treated as ordinary business expenses for deduction purposes in the same way as other businesses. Instead, they remain limited and self-employment tax applies without fully reducing income for those losses.
Self-employment tax still applies to the net profit after allowable deductions, so the 90% cap worsens the tax burden by increasing the taxable base.
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