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IRA Deduction for Self-Employed Daughter Doesn't Seem to be Working or Calculating Correctly

Hello!  My daughter took a year off from college last year and became "self-employed" as a nanny/caregiver.  She earned $7,083 ("self-employed") without any taxes withheld, along with $813 in W-2 income from a part-time job as she went back to school last Fall.  She also has $151 in dividends from a UTMA.   Currently, TurboTax Premier shows that she owes $1,014 to the Feds and $145 to Oregon State tax.  In trying to reduce her tax liability, we've want to open an IRA and contribute to it.  When I enter a $2,000 contribution for '21, the Fed tax of $1,014 remains unchanged, while the contribution does reduce her State tax liability.  It seems to me they should both be lowered (both Fed and State).  Could this possibly be a glitch or bug in the software?  I would appreciate any insights anyone can share.  Thank you!

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8 Replies
ErnieS0
Expert Alumni

IRA Deduction for Self-Employed Daughter Doesn't Seem to be Working or Calculating Correctly

There is no glitch in TurboTax. An IRA will not reduce your daughter’s federal tax due because your daughter owes no federal income tax. She owes self-employment tax because no Social Security or Medicare tax was withheld from her pay.

 

Her standard deduction of up to $12,550 is larger than her income so she has no federal tax liability.

 

You can reduce her self-employment tax by adding business expenses and reducing the amount of net profit.

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IRA Deduction for Self-Employed Daughter Doesn't Seem to be Working or Calculating Correctly

Ernie,

Thank you very much for your reply and insight.  It makes sense and I very much appreciate you clarifying the situation for me.

 

Re: the business expenses, I have entered a minimal amount  for her (i.e. mileage expense and gas) but it hasn't seemed to lower either her Fed or State Tax so perhaps there is a threshold she needs to meet in order for the expenses to impact and lower her tax?  I will look at her taxes again to see if I am entering the expenses in correctly.

 

Again, thank you for taking the time to respond to my question.  I do appreciate it!

 

PatriciaV
Expert Alumni

IRA Deduction for Self-Employed Daughter Doesn't Seem to be Working or Calculating Correctly

Did she pay her own health insurance premiums? Self-employed health insurance deductions are often overlooked. Did she buy any supplies, books, or take related classes? Did she wear a uniform or special clothing when working?

 

The threshold for self-employment tax is $400. Any net income below that level is not subject to SE tax.

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IRA Deduction for Self-Employed Daughter Doesn't Seem to be Working or Calculating Correctly

Thank you PatriciaV.  I appreciate your response.

 

Our daughter was on our health insurance plan (as a young adult / college student) so she didn't have any healthcare related expenses.  The only expenses she incurred during the five months she was a child caregiver were: (1) gas, (2) mileage, and (3) occasional meals outside of the client family's home.  Strangely, the expenses I have entered for her so far, gas and mileage, have not reduced her Fed or State tax liabilities at all... which I find a little strange.  So that was the reason for my question... Am I doing something wrong in entering the several hundred dollars worth of expenses?  Or, is there a minimum amount of expenses she has to have in order to reduce her Fed and State Tax liability (and she's just not meeting that minimum)?  I'm puzzled by this.  Thank you again.

 

P.S.  My daughter is studying for a degree in Child Life / Child Development.  Although she wasn't in school at the time she was self-employed as a Child Caregiver, are you suggesting she could deduct classes or books she took during 2021 that are related to this?  Thank you.

ColeenD3
Expert Alumni

IRA Deduction for Self-Employed Daughter Doesn't Seem to be Working or Calculating Correctly

She would have needed to buy the books while she was self-employed. It would not be a work expense if she purchased them prior to having the job.

 

This calculation is correct. Self-employment income is subject to 15.3% SE taxes on the gain. 

IRA Deduction for Self-Employed Daughter Doesn't Seem to be Working or Calculating Correctly

Thank you for your response ColleenD3.  I understand that books, supplies etc. would have needed to be bought during her time of self-employment so thank you for clarifying.


From ErnieSO’s (Expert) response yesterday, he said… “You can reduce her self-employment tax by adding business expenses and reducing the amount of net profit.”

 

When I enter her expenses (primarily gas and mileage), her Fed and State Tax is not reduced at all in TurboTax.  Does that make sense?

 

Thank you again!

PatriciaV
Expert Alumni

IRA Deduction for Self-Employed Daughter Doesn't Seem to be Working or Calculating Correctly

Please confirm that you are entering her vehicle expenses under her self-employed business.

 

You might also review Schedule C for this business to see how the expenses affect the net income. Then check Schedule SE for the calculation of self-employment tax.

 

For more help in TurboTax Online, see Preview My Return Before Filing

If you're using TurboTax CD/Download, see What is Forms Mode?

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IRA Deduction for Self-Employed Daughter Doesn't Seem to be Working or Calculating Correctly

Good morning PatriciaV.  With your suggestion, I think I found the problem with the mileage expense... I switched to the forms view and could see the 'total mileage' wasn't filled-in and the field was highlighted in red.  Once I entered a number there, it performed the calculation and reduced her tax.  So thank you!

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