Income diversification is viewed as a critical component of poverty reduction in developing countries. Governments promote agricultural policies to increase farm household income. This paper analyzes income diversification strategies of smallholder coffee producers in Nepal using survey data for 441 households. Results show that households derive a higher share of their income from off-farm sources than from farm sources. The income from off-farm sources, including remittance, depends on family size and household education. Household education increases income through access to off-farm domestic and international labour markets. Access to education is a critically important precursor to increasing income and reducing dependence on resource-poor farms. Low-income households with a relatively high proportion of income derived from agriculture benefit the most from commodity-based extension policy.