Roth contribution too high. Really?

Forum|Forum|5 years ago
March 7, 2021
1 reply
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My daughter is self-employed, with net business income in 2020 of $6,101 (not much work for a singer in 2020). In the Roth IRA section, TurboTax says her earned income was only $5,670, making the $6,000 she paid into her Roth IRA too high. But IRA rules say earned income includes "net earnings from self-employment," which clearly is $6,101. Why did TurboTax reduce her self-employment income by $431?

Yes, I entered her 1099-NEC details under Business Income & Expenses, not under Personal: Other Common Income.

dmertz

Level 15

Her maximum permissible IRA contribution is $5,670 because "net earnings from self-employment" is defined as net profit minus the deductible portion of self-employment taxes. It is defined this way because one-half of the self-employment tax is equivalent to the employer-paid portion of self-employment taxes which reduces the employer's profit.

In your daughter's case, self-employment tax is $862, so net earnings are $6,101 - $431 = $5,670, making $5,670 her maximum permissible IRA contribution.