Roth Earned Income

Forum|Forum|2 years ago
March 22, 2024
2 replies
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I have earned income of $5000 but I received a $600 deduction from Self Employment Taxes.

Can I contribute $5000 to my IRA or can I contribute $4400 ($5000-600=$4400)?

TurboTax Home & Biz Windows

Best answer by VolvoGirl

How much is your Schedule C Net Profit? And self employment tax? You only need to deduct 1/2 the self employment tax. Do you have any W2 income?

The self employment tax on 5,000 is $706. 1/2 is $353. So 5,000-353= $4,647.

For an IRA contribution. If you only have self-employment income you can only contribute up to your net profit reduced by the deduction allowed for one-half of your self-employment taxes. See IRS publication 590 http://www.irs.gov/pub/irs-pdf/p590a.pdf

So check 1040 Schedule 1 line 15. You have to deduct that amount from your Schedule C Net Profit. That will give you the allowed contribution for self employment & 1099NEC income.

VolvoGirlAnswer

Employee

How much is your Schedule C Net Profit? And self employment tax? You only need to deduct 1/2 the self employment tax. Do you have any W2 income?

The self employment tax on 5,000 is $706. 1/2 is $353. So 5,000-353= $4,647.

So check 1040 Schedule 1 line 15. You have to deduct that amount from your Schedule C Net Profit. That will give you the allowed contribution for self employment & 1099NEC income.

MelO4Author

Thanks so much for your reply!

My Schedule C net profit is $5000 and the Self Employment Tax I must pay is $1200, making the Self Employment Deduction $600. I have no W-2s.

I understand all this but the thing that is making me crazy is TT is not calculating this properly. For some reason TT is using only the profits made on one Sch C and not subtracting out the losses on the second Sch C and not subtracting out the Self Employment Deduction.

TT says I can make a $7000. I am over 50.

This is what it should be:

Sch C-1: $7000 profit

Sch C-2: $2000 loss

Net profit on Sch Cs: $5000

Less Self Employmt Deduction: -600

Allowable Roth IRA contribution: $4400

If I intentionally put in a higher contribution, over $7000, TT kicks in and produces Form 5329 and calculates the penalty.

?? I don't know. Any ideas on the calculation discrepancy?

Thanks!!!

VolvoGirl

Employee

Sounds like the 2 Schedule Cs are assigned to different spouses. Are you married? Because the self employment tax on combined 5,000 profit is only $706. Or do you have any K-1 income? Check the Schedule SE and see whose name is on it. Yes It should be combining both Schedule Cs.

maglib

Employee

@MelO4 IT IS YOUR TOTAL TAXABLE INCOME limited so you can contribute up to total regardless of taxes owed. Self employment taxes do not reduce taxable income. You contribution is limited to total taxable income. TRADITIONAL IRA contributions is a valid tax deduction for self-employed individuals. The deductible IRA amount is dependent on factors like income limits, filing status, and whether you or your spouse already contribute to a retirement plan. Only traditional IRAs are tax-deductible.

2023, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:

$6,500 ($7,500 if you're age 50 or older), or
If less, your taxable compensation for the year

You may want to look at a SEP instead of a ROTH. Both a SEP IRA and Roth IRA offer tax benefits when you retire. The main difference between a SEP and Roth IRA is that SEP IRAs offer tax-deferred growth on your investments, while Roth IRAs give you tax-free growth and withdrawals in retirement. Contributions to SEP IRAs are tax deductible.

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