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Why do we not qualify for child care credit?

I have entered my W2s and my wife's income, earned through an S Corp she 100% owns, has been entered to via Schedule K.  Turbo tax says we dont qualify because my wife hasnt any earned income.  Please help!
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Why do we not qualify for child care credit?

Unfortunately, income from a Schedule K-1 (Form 1120S) doesn't count as earned income because the K-1 income is not considered income from self-employment (because you do not pay self-employment tax on the S-Corp income).

S-Corporation owners only make earned income if the S-Corp pays the owner income through a W-2.

See the following from IRS Publication 503:

You Must Have Earned Income

To claim the credit, you (and your spouse if filing jointly) must have earned income during the year.

Earned income.   Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. A net loss from self-employment reduces earned income. Earned income also includes strike benefits and any disability pay you report as wages.

  Generally, only taxable compensation is included. For example, foreign earned income and Medicaid waiver payments you exclude from income aren't included. However, you can elect to include nontaxable combat pay in earned income. If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. (In other words, if one of you makes the election, the other one can also make it but doesn't have to.) Including this income will give you a larger credit only if your (or your spouse's) other earned income is less than the amount entered on line 3 of Form 2441. You should figure your credit both ways and make the election if it gives you a greater tax benefit.

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New Member

Why do we not qualify for child care credit?

Unfortunately, income from a Schedule K-1 (Form 1120S) doesn't count as earned income because the K-1 income is not considered income from self-employment (because you do not pay self-employment tax on the S-Corp income).

S-Corporation owners only make earned income if the S-Corp pays the owner income through a W-2.

See the following from IRS Publication 503:

You Must Have Earned Income

To claim the credit, you (and your spouse if filing jointly) must have earned income during the year.

Earned income.   Earned income includes wages, salaries, tips, other taxable employee compensation, and net earnings from self-employment. A net loss from self-employment reduces earned income. Earned income also includes strike benefits and any disability pay you report as wages.

  Generally, only taxable compensation is included. For example, foreign earned income and Medicaid waiver payments you exclude from income aren't included. However, you can elect to include nontaxable combat pay in earned income. If you are filing a joint return and both you and your spouse received nontaxable combat pay, you can each make your own election. (In other words, if one of you makes the election, the other one can also make it but doesn't have to.) Including this income will give you a larger credit only if your (or your spouse's) other earned income is less than the amount entered on line 3 of Form 2441. You should figure your credit both ways and make the election if it gives you a greater tax benefit.

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