Can income reported on a 1099-NEC be contributed to Roth IRA (I meet other Roth requirements)

[JRB100]

I meet all requirements to contribute to a Roth IRA and would like to use income reported on a 1099-NEC. I currently have not met my 2021 maximum allowed.

[Opus 17]

You need to file a schedule C for self-employment.  The amount that is considered compensation for purposes of a Roth IRA is your net income from self-employment after subtracting expenses and half the self-employment tax.

A 1099-NEC is not by itself sufficient.  It might have been issued by mistake and you aren’t really self-employed, and it doesn’t take into account any of your legitimate business expenses.  You are also required to deduct all of your legitimate business expenses — you can’t leave some expenses off your schedule C to generate a higher income for other tax purposes. That would be considered tax fraud just as much as if you claimed false expenses to lower your taxable income.

[JRB100]

I worked two interscholastic events and was paid by the organization. The 1099-NEC seems to apply in this case.

[Opus 17 · Accepted solution]

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@JRB100 wrote:

I worked two interscholastic events and was paid by the organization. The 1099-NEC seems to apply in this case.

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Maybe yes, maybe no.  Roth contributions are based on "compensation" for services performed.  That in turn is controlled by whether this is a business activity or a hobby.  Hobby income is not treated as compensation for services performed under the tax laws, even if you performed a service as part of the hobby.  The tax code looks at your income subject to self-employment tax or social security tax as proof that it was compensation, so you need a schedule C and a Schedule SE for a self-employed business.

Even if the income was issued on a 1099-NEC, it would be classified as hobby or other income if it is occasional or sporadic.  For an activity to be reported on schedule C, it must be an "ongoing trade or business", where you actively engage in business activities with the clear intention of making a profit.  Here are some resources to read.

https://turbotax.intuit.com/tax-tips/small-business-taxes/when-the-irs-classifies-your-business-as-a...

https://www.irs.gov/newsroom/earning-side-income-is-it-a-hobby-or-a-business 

Most of the time, the IRS is going to look at downgrading a business to a hobby because the person isn't really trying to make a profit, and is using the "business" as an excuse to deduct personal expenses as business expenses and create artificial tax losses they can deduct from their other income.  Here, you are trying to claim what is probably hobby activity as a business so you can qualify for a Roth contribution.   A referee/official can be an ongoing business activity if you do it to make money, you have availabilty, you put yourself on the call list, and so on.  But twice in an entire year sounds like a hobby to me.

In Turbotax, when you enter a 1099-NEC, you should be asked questions about whether this was an ongoing business activity with an intent to make a profit.  Based on your answers, Turbotax will classify the income as hobby or business.  If you are being told you can't contribute to a Roth, that's why.  You would need to delete the 1099s and re-enter them, changing your answers as to profit motive.  That will trigger a schedule C.  You will pay 15% self-employment tax on your net profit after expenses.  Your "compensation" for purposes of a Roth contribution is your net income minus half the self-employment tax, which is about 92% of your net income after expenses.