I am self employed. Turbo tax, in determining my Earned Income for the purposes of calculating the upper limit for a yearly contribution for a Roth IRA, uses the following algorithim:
Schedule C line 31 "Net Profit" - 1/2 Self Employment Tax.
I am wondering if this is the correct calculation... why is 1/2 Self Employment tax subtracted from Net Profit?
Isn't Net Profit = Earned Income?
I posed the question to both Copilot and Gemni AIs and both, while acknowledging that deducting 1/2 the employment tax is appropriate for the Earned Income Credit calculation, it should not be included in the calculation of Earned Income for the purposes of the limit of a Roth IRA contribution. Is this an issue with the Turbo Tax programming?
Thanks in advance.
Yes, this calculation of net earnings is correct. See "Earned Income" on page 6 of IRS Pub 560.
The deductible portion of SE tax is subtracted because this is the equivalent of the employer portion of Social Security and Medicare taxes which is effectively an expense of the employer, so it must be subtracted from net profit to determine net earnings.
AIs are notorious for producing incorrect answers to questions of law, particularly those related to retirement accounts, as is demonstrated by the incorrect answers you received from the Copilot and Gemini AIs.
Yes, this calculation of net earnings is correct. See "Earned Income" on page 6 of IRS Pub 560.
The deductible portion of SE tax is subtracted because this is the equivalent of the employer portion of Social Security and Medicare taxes which is effectively an expense of the employer, so it must be subtracted from net profit to determine net earnings.
AIs are notorious for producing incorrect answers to questions of law, particularly those related to retirement accounts, as is demonstrated by the incorrect answers you received from the Copilot and Gemini AIs.