Business income different from Earned Income for Minor Child?

[Homer315]

My 13-year old daughter worked hard last year and earned $4,250 by babysitting and walking dogs around the neighborhood (i.e. she freelanced and was not employed by anyone).  I decided that she would file her own tax return for the first time this year because I wanted to open a Roth IRA for her.  I opened a Roth IRA for her and deposited the same amount ($4250) into the Roth IRA account in December. 

I then started a new tax return in Turbotax, just for her.  I inputted $4,250 as "Business income" and I did not report any business expenses or deductions -- only income.  When I went to report how much money I had deposited into the newly-created Roth IRA ($4250, which is the max, based on how much she made babysitting/dog walking), Turbotax told me that my daughter's earned income is only $3,949, or $301 less than the total I reported she earned as business income.  I can't figure out why the earned income is different (less) from the business income, given that she had no business expenses to deduct from income.  Turbotax is telling me that I deposited too much into her Roth account as a result.  Any suggestions?

[DawnC]

It is the self-employment tax.   One-half of the self-employment tax is removed from Earned Income.    The self-employment tax (social security and Medicare tax) is an adjustment to Earned Income.   If you have earnings subject to self-employment tax, use Schedule SE to figure your net earnings from self-employment.   

Before you figure your net earnings, you generally need to figure your total earnings subject to self-employment tax.   $4250 is her total earnings subject to SE tax - her net earnings are $3949.  

She has a Sched SE and an Earned Inc Wks included in her return that shows the adjustment.    The contribution limit is net earnings from self-employment.   

[VolvoGirl]

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.

And by the way, she's doesn't have a choice.  She has to file her own return got self employment income.  Even if she doesn't owe regular income tax on it she owes self employment tax on a Net Profit of $400 or more.

Be sure on the dependent return you check the box that says you can be claimed on someone else’s return.  

[Homer315]

Thanks so much!  I wondered whether her self-employment tax may play some sort of role in the situation.  It's kind of annoying that it limits her ability to contribute to the Roth though.  I don't mind filing a tax return for her and specifically paying the self-employment tax, but it seems like a penalty to then also use that tax amount she has to pay to further limit her retirement contribution...

[SweetieJean]

Just be aware that she is legally required to claim all allowable expenses.