What Is Exempt?
The taxing authority of the federal government extends ONLY to any activity over which it has authority to exercise control, and any activity outside that authority is “exempt” from taxation by the federal government.
U S. Supreme Court in McCulloch v. Maryland, 17 U.S. 316 (1819)
The federal government is forbidden by the Constitution to regulate or abridge the exercise of a fundamental right, those rights that are included in the “right to life, liberty and the pursuit of happiness.” Among those fundamental rights are your right to freedom of speech, to worship as you choose and your right to earn a living for yourself and your family through any lawful occupation.
U. S. Supreme Court in Butchers' Union Co. v. Crescent City Co., 111 U.S. 746, 4 S.Ct. 652 (1884); Yick Wo v. Hopkins, 118 U.S. 356 (1886); Truax v. Raich, 239 U.S. 33 (1915); Coppage v. Kansas, 236 U.S. 1; Adams v. Tanner, 244 U.S. 590, 37 S.Ct. 662 (1917); Meyer v. Nebraska, 262 U.S. 390, 43 S.Ct. 625 (1923); and many other cases.
Because the power to tax is the power to destroy (Chief Justice John Marshall in McCulloch v. Maryland, above), and because the federal government does not have the right to restrict, much less destroy, your fundamental rights, the exercise of a fundamental right, such as your freedom of speech, your freedom of religion and your freedom and right to earn a living through any lawful occupation is EXEMPT from taxation by the federal government!
U. S. Supreme Court in Grosjean v. American Press Co., 297 U.S. 233 (1936); and, again, in Murdock v. Pennsylvania, 319 U.S. 105 63 S.Ct. 870 (1943); and, again, in Jones v. Opelika, 316 U.S. 584, 56 S.Ct. 444 (1943); Follett v. McCormick, 321 U.S. 573 64 S.Ct. 717 (1944); and Harper v. Virginia Bd. Of Elections, 383 U.S. 663, 86 S.Ct. 1079 (1966).
The law, as it is written, instructs us to EXCLUDE EXEMPT INCOME (26 CFR § 1.861-8T), so even if part of your personal earnings can be separated as profit “derived from compensation for services”, that exempt income should be excluded from your gross income.