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!
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).
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.
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!
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.
@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.
@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.
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)
@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!
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.
Thanks for all your help! I'm glad my wife's consulting is done - not worth the headaches for the money!
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.
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.
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
Try deleting your Form 1099-NEC completely and re-entering it. It is possible it is not linking to Schedule C. Since it is earned income, you should be allowed to contribute to a Roth IRA.
To delete Form 1099-NEC, follow these steps:
Next, re-enter Form 1099-NEC in the Self-employed income & expenses section.
As KathrynG3 says, the income has to be reported on Schedule C to be considered as earned income (compensation). It's your net income after expenses that qualifies you, not the amount on the 1099-NEC.
Well, after two updates to turbo tax and now second week of MARCH. We are being told that the ROTH CONTRIBUTION exceeds income. We too completed 1099-NEC compensation input that my wife received as a commission but it is no showing up as income. Come-on Intuit and fix this bug.
Hi, I'm having a similar problem here when trying to file. I am a graduate student that is compensated through a 1099-NEC for my stipend. I am NOT self-employed and was told to make sure that this is not listed as a self-employment or on a Schedule C, since that will incur self-employment taxes that do not apply to me. When I indicate there are no deductions, TT does not re-classify this 1099-NEC as business income, which is great.
However, when I enter the amount I've contributed to my Roth IRA, it says I have "excess contribution" because it is not counting the amount listed under the 1099-NEC as income. Any advice here? Can I just not include the Roth IRA on my taxes? I was under the impression that it should not change the taxes owed anyway, however when I delete the Roth IRA entry, it reduces the amount of taxes I owe in the top corner.
@nd13 wrote:
Hi, I'm having a similar problem here when trying to file. I am a graduate student that is compensated through a 1099-NEC for my stipend. I am NOT self-employed and was told to make sure that this is not listed as a self-employment or on a Schedule C, since that will incur self-employment taxes that do not apply to me. When I indicate there are no deductions, TT does not re-classify this 1099-NEC as business income, which is great.
However, when I enter the amount I've contributed to my Roth IRA, it says I have "excess contribution" because it is not counting the amount listed under the 1099-NEC as income. Any advice here? Can I just not include the Roth IRA on my taxes? I was under the impression that it should not change the taxes owed anyway, however when I delete the Roth IRA entry, it reduces the amount of taxes I owe in the top corner.
The grad stipend issue is separate from the general problems created by the way Turbotax changed the workflow around 1099-MISC and 1099-NEC forms. I would post your question as a new topic, and then we can see if someone has a workaround or if there is a timetable for a fix.
@nd13 wrote:
Hi, I'm having a similar problem here when trying to file. I am a graduate student that is compensated through a 1099-NEC for my stipend. I am NOT self-employed and was told to make sure that this is not listed as a self-employment or on a Schedule C, since that will incur self-employment taxes that do not apply to me. When I indicate there are no deductions, TT does not re-classify this 1099-NEC as business income, which is great.
However, when I enter the amount I've contributed to my Roth IRA, it says I have "excess contribution" because it is not counting the amount listed under the 1099-NEC as income. Any advice here? Can I just not include the Roth IRA on my taxes? I was under the impression that it should not change the taxes owed anyway, however when I delete the Roth IRA entry, it reduces the amount of taxes I owe in the top corner.
It appears you need to enter the income as a scholarship in the education section of the Deductions page, and not as 1099 income on the income page.
To report stipend income in TurboTax, you must visit Deductions and Credits, Education Expenses section. You must answer all the questions, the taxable amount will be computed as the excess of your scholarship over the qualified education expenses.
Once done, you may review your form 1040 and to verify that line 7 of the form looks correct. You may do so prior to paying for the program:
@Hal_Al wrote:
@nd13 You can't have your cake and eat it too.
If you want the income to not be subject to self employment tax (social security and Medicare tax), you have to enter it as taxable scholarship. That means it's not earned income and therefore does not qualify you for an IRA contribution.
No, the SECURE act included a provision that stipends for graduate students and postdoctoral fellows that meet certain conditions are treated as "compensation" for purposes of contributing to an IRA, even though they are not "earned income" for any other purpose.
The trick is entering it correctly in Turbotax, which apparently requires going through the Education deduction interview instead of the 1099 income interview.
Good god yes... this is one hell of a mess in TurboTax. I've already spent 4 hours trying to figure out why my wife''s 1099-NEC self employment income isn't earned income... much less getting it fixed.
@ClintinWC wrote:
Good god yes... this is one hell of a mess in TurboTax. I've already spent 4 hours trying to figure out why my wife''s 1099-NEC self employment income isn't earned income... much less getting it fixed.
This is a long and old discussion with several different problems. What exactly is your issue? If your spouse is self-employed, it will work best if you create the job, then enter the 1099 as job income. In the past, it was possible to enter the 1099 first, which would create the job (schedule C) but that doesn't work as well this year.