Can 1099-NEC amount be used for Roth IRA contribution?

[J2W2]

Hi,

My wife retired in 2019. She earned a small amount of wages as a consultant in 2020. She also received a small bonus from her former employer (this was a year-end bonus for her work done in 2019, paid out in 2020). She made a Roth IRA contribution equal to the wages and bonus she received in 2020.

When I enter this information into TurboTax, it tells me the 1099-NEC amount (how her bonus was reported) is not eligible for her Roth IRA, and that she has over contributed in 2020.

I thought bonuses were considered earned income, and thus eligible for Roth IRA contributions. Which is correct?

Thanks for your help!

[Hal_Al]

In order for the bonus to be treated as earned income (compensation), it must be entered as self employment income.  That is you must pay self employment (social security & medicare) tax on it.  In addition, the amount of the income must be reduce by the deduction for 1/2 the self employment tax.  Effectively only 92.35% of her 1099-NEC income is eligible for an IRA contribution. And that assumes she has no business expenses deductions reducing her net profit (92.35% of her NET self employment income is eligible for an IRA contribution). 

[J2W2]

The bonus was not self-employment income, it was a bonus paid for work performed in 2019, when she was employed by the company she retired from. They always paid out their bonuses in February of the following year.

The bonus was for $775, and was sent to her with an earnings statement. Her former employer withheld federal, state, social security and Medicare from the amount, paying her a net of $606.77.

[J2W2]

I was looking at this more, and I was incorrect on the bonus - it was actually reported to us on a W-2. I believe everything is good with that.

The consulting fees she collected were reported to us on a 1099-NEC.

To me, it appears there is a bug in the TurboTax software. When entering the 1099-NEC information, I select my wife. I enter the rest of the 1099-NEC information and hit the Continue button. I enter the reason for the 1099-NEC (Consulting) and hit Continue again. The software then asks if I (not my wife) owned a farm, had a lawsuit settlement, etc. If I enter everything and then go back to look at it with the edit button, it has my name selected instead of hers.

Doesn't this sound like a software issue, and if so, how do I report that?

Thanks!

[Opus 17]

I was looking at the same situation the other day, although I have not studied it. It appeared to me that if you enter a 1099-NEC in the standalone section for 1099‘s, that a schedule SE for self-employment tax and a schedule C are not generated.  For self-employment income, you need to be in TurboTax self-employed online.  Then look up the screen of death from the 1099 section where are you will see a separate section for entering a small business income. You need to create a business for your spouse and enter the income in the business, and then delete the duplicate 1099 from the 1099 section. That will create a schedule C and will allow you to list expenses, if you have any, and will add the self-employment tax to your tax bill, but will make the income qualified for a Roth IRA.  Note that because of the deduction for self-employment taxes, the entire amount of your wife’s 1099 income will not count as earned income, only 92% of it.  So her Roth contribution limit would be the $600 or so of bonus +92% of her 1099 income.

I will try to follow up with this with the moderators.  I don’t claim to be an expert, but it appears that TurboTax has created two different ways to enter a 1099-NEC, only one of which generates a schedule C.

[Hal_Al]

deleted

[Hal_Al]

@Opus 17  Here's what I observed (I have download Deluxe):  TurboTax automatically defaults to calling it other income and putting it on line 8 of schedule 1 IF you say you do not have any expenses to deduct. You can then go to the business income section and reclassify it as self employment,

If you say you have expenses to deduct , the income goes to self employment

The whole $775 will classify as earned income not the net $607. 

@J2W2  When you first enter the1099-NEC section, you will be asked if the 1099-NEC is for you or your spouse.  I defaults to you (the taxpayer). So, you have to change it for her.

If you have "compensation", that can be counted to qualify your spouses IRA contribution. But you can't double dip, count the same earned income amount for both you and her. 

[J2W2]

@Hal_Al Sorry I've kind of messed this up, but to clarify: her bonus was $775 ($607 after taxes); as you said, I believe all $775 can be contributed to her Roth IRA. Her consulting work for her former employer, which was reported on her 1099-NEC, was for 861.70. Per what you and Opus_17 said, it sounds like only 92.35% of that can be contributed to her Roth IRA. I realize these amounts can only be contributed to her Roth IRA.

For the 1099-NEC, she does not have any expenses to deduct. Does that mean there is not a way to get this amount considered self employed income in TurboTax Deluxe?

Finally, I still believe there is a software issue in the 1099-NEC section of TurboTax Deluxe. Even though I change the entry to my wife (second name), it still wants to process the entry for me. On the third and fourth screens, it uses my name and not hers. If I edit the entry after I complete it, my name is selected instead of hers. The employer federal ID number format is also no longer selected.  I've attached a couple of screenshots to try and show this.

As entered.When I edit it.

[Hal_Al]

Try deleting the 1099-NEC and then enter a new one.

After going thru the 1099-NEC section, scroll down to the Business income and expenses section and match the 1099-nec to her "business" (self employment)

[J2W2]

@Hal_Al @Opus 17 I just deleted the 1099-NEC (it's the only one we have), closed down TurboTax, restarted it and re-entered the 1099-NEC. It still uses my name on the third and fourth screens and my name is selected if I go back and edit the entry. I really think this is a software bug. Can one of you try recreating this?

Thanks!

[Hal_Al · Accepted solution]

Yep, you're right; it's a bug.  

But it won't affect you.  Despite using your name on the next screens, it will generate the Schedule C in your spouse's name (at least it does in download Deluxe).

I've reported it.

[J2W2]

Thanks for all your help! I'm glad my wife's consulting is done - not worth the headaches for the money!

[Frank McCormick]

It would be great if TT could fix this bug that doesn't count 1099-NEC income as earned income.  It would save everyone a lot of time coming up with work arounds.

[ThomasM125]

The default treatment of income reported on a form 1099-NEC is self-employment income. However, it is not always self-employment income. For instance, it can report proceeds form lawsuits, prize money, awards and things not related to work. If so, the income would not be considered self-employment income.

So, TurboTax may be correct in treating it as other income, based on the way the questions are answered in the program.

[Frank McCormick]

Many thanks for getting back to me.  My 1099-NEC income was for consulting.  But TT says I can't contribute to a Roth because I do not have any earned income.

Frank