Question

Why is TT calculating a lower contribution limit than what is reported on our 1099-NEC? TT is subtracting self-employment tax to reach a lower IRA contribution limit.

Forum|Forum|1 year ago
March 22, 2025
2 replies
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Example -- summer job as a baseball coach generated a 1099-NEC for $1,049 of self employment income. TT calculates $74 in self-employment tax, and further calculates Roth IRA contribution limit of $1049-74 = $975. The IRS earned income publication does not make any mention of subtracting self-employment tax: Earned income includes all the taxable income and wages from working either as an employee or from running or owning a business. It also includes certain other types of taxable income. Earned income includes: Wages, salaries, tips and other taxable employee pay Net earnings from self-employment Union strike benefits Long-term disability benefits received prior to minimum retirement age

M

MindyB

The TurboTax calculation is correct. When figuring compensation for a self-employed individual, reduce your net earnings by one-half of your self-employment tax.

See: Deduction limits for the self employed

R

ryhartmullerAuthor

Thanks everyone -- that is helpful and explains the why. That said, outside of the IRS fact sheet, where in the published tax code is this specified? The instructions that came up in an IRS search didn't provide this detail and are misleading (at least in my opinion) to anyone outside of professional tax advisors. I did a fair amount of searching online before I posted and couldn't find anything.

Now, why my son's summer job is comping him via 1099-NEC is a different story...

VolvoGirl

See IRS Pub 590A Contributions to IRAs page 6 What is Compensation - Self Employment Income.

The deduction allowed for the deductible part of yourself-employment taxes.

https://www.irs.gov/pub/irs-pdf/p590a.pdf

VolvoGirl

It should be only subtracting half of the SE tax or $37. Unless your self employment tax was actually $148.

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 then only up to the max IRA limit.

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.