I have $750 of compensation on a 1099-MISC. Is this "Earned Income?" If so, why is Turbo Tax saying I can deduct on $697 of my $750 IRA contribution?

[VolvoGirl · Accepted solution]

1099Misc is self employment income and you fill out schedule C for it.  You pay about 15.3% self employment tax on the Net Profit on sch C.

For an IRA contribution.  If you only have self-employment income you can only contribute up to your net profit reduced by the deduction allowed for one-half of your self-employment taxes.  See IRS publication 590 http://www.irs.gov/pub/irs-pdf/p590a.pdf

So check 1040 Schedule 1 line 27.  You have to deduct that amount from your Schedule C Net Profit.  That will give you the allowed contribution for the 1099Misc income.

[fanfare]

It's not worth the hassle to remove $53 dollars.

Pay the penalty ($3) and contribute next year $53 less than you otherwise would have.

It all goes on Form 5329.

[dmertz]

This assumes that this individual will be eligible to make a $53 traditional IRA contribution for 2019.

[fanfare]

If not, the penalty is but another $3.

[dmertz]

... every year until resolved.

[MichaelL1]

That is correct, as your self-employment tax reduces the amount that you can use to determine your IRA contribution.

I just duplicated your $750 and also got $697 for the IRA.

See this link: https://www.fool.com/retirement/iras/2017/05/28/how-much-can-i-contribute-to-my-ira-if-im-self-emp.a...

[btufoster]

Thanks for that answer.  Why is a "self-employment tax" assessed?

[dmertz]

Since you are self-employed with net profit over $432, the law requires you to pay self-employment taxes.

If you made a $750 traditional IRA contribution, it appears that you've made a $53 excess contribution since you only have $697 of net earnings available from which to make the contribution.