Yes, you are correct. IRS--590-A (2025) clearly states that small business losses do not count against earned income. Sometimes, the internal worksheet that calculates "Earned Income" gets stuck on the business' loss.
- Go to Tax Tools > Tools > Delete a Form.
- Find the IRA Contribution Worksheet (it might be labeled IRA Contrib Wks).
- Delete it. This clears the "Zero Income" flag.
- Go to Federal > Wages & Income.
- Ensure your W-2 is the very first thing listed and that the "Owner" of the W-2 matches the "Owner" of the IRA contribution exactly (e.g., if you are Taxpayer 1 on the W-2, you must be Taxpayer 1 for the IRA).
If this doesn't work, try this.
- Go to your Schedule C section and temporarily change an expense so that your net profit is $0 instead of a negative number.
- Go to the IRA Contribution section. TurboTax should now see your W-2 income, realize you have $7,000+ in compensation, and stop the 6% penalty.
- Crucial: Once the "Penalty" warning is gone, go back to Schedule C and change your expense back to the correct amount.
For most situations, the “Contribution Limit” check only occurs once. After it’s met, the penalty usually won’t show up again if the loss is restored.
If you are covered by a retirement plan at your W-2 job (Box 13 "Retirement Plan" is checked), TurboTax might be confusing your Deduction Limit with your Contribution Limit. Even if you can't deduct the Traditional IRA contribution due to income/loss, you are still allowed to make the contribution as "Nondeductible" without a penalty.
Make sure you tell the program you want to keep the contribution as Nondeductible rather than withdrawing it, if this is the case.
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