1099NEC and IRA Deductions

[Msmmym]

I have two questions concerning income documented on a 1099-NEC and IRA deductions

1) If the income reported on a 1099NEC is from a "sporadic source", and that uncommon situation is checked in TT, is that money not considered income and therefore you can not take a deduction for a Traditional IRA contribution?

2) The only income received is from a 1099NEC of $5931 and is reported as self employed in TT.  TT walks you thru completing Schedule C and making a Traditional IRA contribution.  The end result is Federal Deductions are greater than the income, so that the taxable income is 0.  Yet TT still indicates that a tax of $837 is due.  This tax does not change regardless of whether I record and IRA contribution or not.  How is it that you can have a taxable income of $0 and still owe tax?  And, if TT indicates that an IRA deduction is permitted, why does not the amount of tax owed vary as I vary the amount of the IRA contribution?  Please see below 

[dmertz]

1)  The money would be income, but not compensation.  IRA contributions require compensation.

2)  Deductible IRA contributions have no effect on the amount of self-employment tax one owes, it only reduces the amount of income subject to ordinary income tax.  The $837 is entirely self-employment tax.

If have no income subject to ordinary income tax even without the deduction for a traditional IRA contribution, it makes no sense to make a traditional IRA contribution instead of a Roth IRA contribution.

[MonikaK1]

Money reported on Form 1099-NEC is still income even if it is considered "sporadic", not part of an ongoing business, and therefore not subject to self-employment tax. The answers to the questions in the 1099-NEC section lead TurboTax to determine whether the income should be subject to self-employment tax. 

At the question, "Does one of these uncommon situations apply?" you can indicate that this is "from sporadic activity or hobby (this is not common)" if it is a one-time payment.

Any self-employment tax that you pay adds to your Social Security account for retirement and to your Medicare account.

If the money is treated as subject to self-employment tax, the rate is 15.3% for 2022 (12.4% for Social Security taxes and 2.9% for Medicare taxes). You could easily have self-employment tax on net self-employment earnings, yet still have taxable income for income tax of zero.

If your income is less than your standard deduction, you generally won't have any income tax and it won't matter for 2022 whether you have a deductible IRA contribution.

To contribute to a traditional IRA, you, and/or your spouse if you file a joint return, must have taxable compensation, such as wages, salaries, commissions, tips, bonuses, or net income from self-employment. For tax years beginning after 2019, there is no age limit to contribute to a traditional IRA. Compensation for purposes of contributing to an IRA doesn't include earnings and profits from property, such as rental income, interest, and dividend income, or any amount received as pension or annuity income, or as deferred compensation. In certain cases, other amounts may be treated as compensation for purposes of contributing to an IRA, including certain alimony and separate maintenance payments received, certain amounts received to aid in the pursuit of graduate and postdoctoral studies, and certain difficulty of care payments received. See this IRS webpage for more information.

See this IRS webpage for more information about IRA contributions. Please also see this tax tips article for more information about deductible retirement contributions.

See this IRS webpage for more information about self-employment tax.

@Msmmym 

[Msmmym]

Thank you.  That answers my question

[Msmmym]

Thank you.  This answers my question