Roth Earned Income

[MelO4]

I have earned income of $5000 but I received a $600 deduction from Self Employment Taxes.

Can I contribute $5000 to my IRA or can I contribute $4400 ($5000-600=$4400)?

[VolvoGirl · Accepted solution]

How much is your Schedule C Net Profit?  And self employment tax?  You only need to deduct 1/2 the self employment tax.  Do you have any W2 income?  

The self employment tax on 5,000 is $706.  1/2 is $353.  So 5,000-353= $4,647.   

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 15.  You have to deduct that amount from your Schedule C Net Profit.  That will give you the allowed contribution for self employment & 1099NEC income.

[maglib]

@MelO4   IT IS YOUR TOTAL TAXABLE INCOME limited so you can contribute up to total regardless of taxes owed. Self employment taxes do not reduce taxable income.  You contribution is limited to total taxable income. TRADITIONAL IRA contributions is a valid tax deduction for self-employed individuals. The deductible IRA amount is dependent on factors like income limits, filing status, and whether you or your spouse already contribute to a retirement plan. Only traditional IRAs are tax-deductible.

2023, the total contributions you make each year to all of your traditional IRAs and Roth IRAs can't be more than:

• $6,500 ($7,500 if you're age 50 or older), or
• If less, your taxable compensation for the year

You may want to look at a SEP instead of a ROTH. Both a SEP IRA and Roth IRA offer tax benefits when you retire. The main difference between a SEP and Roth IRA is that SEP IRAs offer tax-deferred growth on your investments, while Roth IRAs give you tax-free growth and withdrawals in retirement. Contributions to SEP IRAs are tax deductible.

[MelO4]

Thanks so much for your reply!

My Schedule C net profit is $5000 and the Self Employment Tax I must pay is $1200, making the Self Employment Deduction $600.  I have no W-2s.

I understand all this but the thing that is making me crazy is TT is not calculating this properly.  For some reason TT is using only the profits made on one Sch C and not subtracting out the losses on the second Sch C and not subtracting out the Self Employment Deduction.  

TT says I can make a $7000.  I am over 50.

This is what it should be:

Sch C-1: $7000 profit

Sch C-2: $2000 loss

Net profit on Sch Cs: $5000

Less Self Employmt Deduction: -600

Allowable Roth IRA contribution: $4400

If I intentionally put in a higher contribution, over $7000, TT kicks in and produces Form 5329 and calculates the penalty.

??  I don't know.  Any ideas on the calculation discrepancy?

Thanks!!!

[VolvoGirl]

Sounds like the 2 Schedule Cs are assigned to different spouses.  Are you married?  Because the self employment tax on combined 5,000 profit is only $706.  Or do you have any K-1 income?  Check the Schedule SE and see whose name is on it.  Yes  It should be combining both Schedule Cs.  

[VolvoGirl]

Yeah something sounds wrong.  Even the self employment tax on 7,000 is only $989.  So where is the 1200 coming from?  What line is it on?  The self employment tax is on the 1040 Schedule 2 line 4 which goes to 1040 line 23.

[VolvoGirl]

Ok 1200 self employment tax would be on a $9,000 profit.  Are you sure the 2,000 loss isn't really a 2,000 Profit? 

[MelO4]

Yes, I am married.  My spouse's Sch SE was a loss so there was no calculation for the Self Employment Tax.

My Sch SE on Line 10 is the $975 Self Employment tax and then right below that on Line 11 there is a 2.9% calculation of $228 making it $1203.  What is the 2.9% charge?

I looked on the Earned Income Worksheet and TT had in fact already deducted the Self Employment deduction.  So, TT is taking out the SE deduction but not combining the two Sch Cs.

Thank you so much for your help!!!  I should have thought of looking on Sch SE first!!  Thank you!!!

[VolvoGirl]

Right the IRA amount is per person so you don't combine the Schedule Cs.  The 2.9% tax is for the Medicare part of the self employment tax.  So your Schedule C profit must have been $8,513 not 7,000.  

For 2023 the max for Social Security is $9,932.40 on $160,200 of wages (160,200 x 6.2%).

Medicare is 2.9% (both er & ee parts) of all wages and  92.35% of Schedule C Net Profit - no max.

You are paying 15.3% for……

SS for employer 6.2% (up to 160,200 wages & profit)

SS for employee 6.2% (up to 160,200 wages & profit)

Medicare for employer 1.45% (on all wages & profit, no max)

Medicare for employee 1.45% (on all wages & profit, no max)

[MelO4]

Thank you so much!!

So are you saying my spouse CAN NOT make a contribution to a Roth IRA (loss on the Sch C) but I can because I had a profit?  

[MelO4]

In the interview part of TT, it says how much are you contributing to your IRA, how much is your spouse contributing (same amount) and accepts it.  In other words, it's letting us each take half of the profit I made.

??

[MelO4]

Ok.  I looked on the Roth IRA Contribution Limit Worksheet and it looks like the profit on my Sch C can be shared with my spouse as to the contribution to a Roth. 

In this case, the Roth earned income is not combining both Sch Cs -- one a profit and one a loss and then allowing the contribution. It's taking my earned income and sharing that with a spouse.

Wow.  So many rules!!!

Thank you!!

[fanfare]

You may fund your spouse's IRA if your spouse makes less compensation than you do, and, of course, has put in less than the allowed max contribution. You must have enough compensation to cover the rest, after subtracting  from your compensation  any contribution you make to your own IRA.

@MelO4 

[MelO4]

Thank you!!!