Can schedule c income be considered pre tax for deductible IRA contribution even if w2 wages were earned but no employer contribution plan activity?

[Anita01 · Accepted solution]

Yes, but it's the profit in the business that counts, not the gross income before expenses.  Having W-2 wages doesn't matter unless the box for covered by a retirement plan is checked.  That checkmark limits you whether you actually participated in the plan or not.

[tkw40]

Question to this answer:  if you do not claim any expenses against the Schedule C income and that Schedule C income/profit is an amount/limit that can be fully contributed to a traditional IRA, will it still will be subject to Social Security and Medicare but not federal and or state tax due to that contribution being deductible since you are not in an employer-sponsored contribution plan (No check mark on w2)?  Could this be an alternative to help tax liability if you have a fidiciary K1 income?

[Anita01]

Yes, it will always be subject to social security and medicare.  The IRA deduction is a deduction against your total income, not just the Schedule C amount.  If you have k-1 income that is taxable on your return, it's part of your total income, against which the IRA deduction is applied.  If your state does not allow for deductible contributions to an IRA to be subtracted from federal income, then it would not benefit you on such a state return.  I want to point out that, while it may not apply to you, if you are receiving an Earned Income Credit, you cannot choose to avoid deducting business expenses if that results in your receiving a higher EIC.

[tkw40]

Thank you.