Using the 2012 Bhutan Living Standard Survey, this paper finds that rural nonfarm activities comprise 60.7% of rural household income in Bhutan and this contribution increases with higher income and education levels. The poor and less educated participate less in the nonfarm sector. When they do, they are self-employed in petty nonfarm activities, which require little investment and little or no skills. Accounting for endogeneity and sample selection issues, we estimate the determinants of participation in nonfarm activities and nonfarm incomes. We find that a household's education and labor supply play an important role in accessing more remunerative nonfarm employment. Interestingly, we find that women play an important role in self-employment in nonfarm activities. Decomposition shows that nonfarm income has a disequalizing effect and farm income has an equalizing effect, indicating the need to increase the endowment of poor households to enable them to access the lucrative rural nonfarm sector. Further decomposition reveals that self-employment in petty nonfarm activities reduces inequality.