Roth IRA Contribution and earned income

[trepdog]

So this is a complicated question as I can not find what I'm exactly looking for on google so I'll try to write this the best I can. 

I maxed out my roth IRA with 6K. When doing taxes I noticed that after all my deductions and expenses for business I was just under 6k. That is for my net income. So does the earned income have to be net or is it based on gross?

[MaryK4 · Accepted solution]

The IRS considers gross, as opposed to net, income when it comes to IRA contribution eligibility. 

[dmertz]

If this self-employment income is your only compensation, you've made an excess contribution.  The amount of self-employment income available to support any type of IRA contribution is net earnings from self-employment.  Net earnings are net profit minus the deductible portion of self-employment taxes.

With regard to the modified AGI limit for determining eligibility to make a Roth IRA contribution, AGI includes only net profit.

The business's gross income is irrelevant with regard to this.

[macuser_22]

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@trepdog wrote:

So this is a complicated question as I can not find what I'm exactly looking for on google so I'll try to write this the best I can. 

I maxed out my roth IRA with 6K. When doing taxes I noticed that after all my deductions and expenses for business I was just under 6k. That is for my net income. So does the earned income have to be net or is it based on gross?

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IRA contributions are from *net* self-employed income.  It is also further reduced by the deductible part of the SE tax and any other retirement plan contributions.

See IRS Pub 590-A

https://www.irs.gov/publications/p590a

What Is Compensation?

Generally, compensation is what you earn from working. For a summary of what compensation does and doesn’t include, see Table 1-1. Compensation includes all of the items discussed next (even if you have more than one type).

Wages, salaries, etc.

Wages, salaries, tips, professional fees, bonuses, and other amounts you receive for providing personal services are compensation. The IRS treats as compensation any amount properly shown in box 1 (Wages, tips, other compensation) of Form W-2, Wage and Tax Statement, provided that amount is reduced by any amount properly shown in box 11 (Nonqualified plans). Scholarship and fellowship payments are compensation for IRA purposes only if shown in box 1 of Form W-2.

Commissions.

An amount you receive that is a percentage of profits or sales price is compensation.

Self-employment income.

If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of:

• The deduction for contributions made on your behalf to retirement plans, and

• The deduction allowed for the deductible part of your self-employment taxes.

Compensation includes earnings from self-employment even if they aren’t subject to self-employment tax because of your religious beliefs.