When filing married filing separately in a community property state, how do I handle 1099 NEC income? Do I split the income before or after business deductions?

It is interesting that you think the program is saying you would be better off if you file separate returns---usually filing MFS is the worst way to file.   

Before you file that way---compare and see which is really better for you.

It is not easy to compare MFJ to MFS using online TT but you can do it.  Since you only get one return for each account and user ID, you have to use 3 accounts and user ID’s—one for MFJ and two for each of the MFS returns.  Compare, choose, and file—and pay—accordingly.

It is much easier to do this comparison using the desktop version of TT installed from a CD or downloaded to your own computer.  You pay once for the software and you can prepare multiple returns easily, and it has a “what if” feature that allows comparisons.

If you were legally married at the end of 2022 your filing choices are married filing jointly or married filing separately.

Married Filing Jointly is usually better, even if one spouse had little or no income. When you file a joint return, you and your spouse will get the married filing jointly standard deduction of $25,900 (+$1400 for each spouse 65 or older)  You are eligible for more credits including education credits, earned income credit, child and dependent care credit, and a larger income limit to receive the child tax credit. 

If you choose to file married filing separately, both spouses have to file the same way—either you both itemize or you both use standard deduction. Your tax rate will be higher than on a joint return. Some of the special rules for filing separately include: you cannot get earned income credit, education credits, adoption credits, or deductions for student loan interest. A higher percent of your Social Security benefits may be taxable. Your limit for SALT (state and local taxes and sales tax) will be only $5000 per spouse. In many cases you will not be able to take the child and dependent care credit. The amount you can contribute to a retirement account will be affected. If you live in a community property state, you will be required to provide additional information regarding your spouse’s income. ( Community property states:  AZ, CA, ID, LA, NV, NM, TX, WA, WI)

 If  you are using online TurboTax to prepare your returns, you will need to prepare two separate returns and pay twice.

https://ttlc.intuit.com/questions/1894449-married-filing-jointly-vs-married-filing-separately

https://ttlc.intuit.com/questions/1901162-married-filing-separately-in-community-property-states

https://ttlc.intuit.com/questions/1894449-is-it-better-for-a-married-couple-to-file-jointly-or-separately

Your refund would be the same, or worse if you file separately in a community property state unless you have individual non-community income.

That’s because a separate filing in a community property state requires you to equalize your tax returns so you are both reporting the same income and withholding. 

If one spouse makes more money than the other, there is a community property adjustment that splits total income 50/50.

Additionally, certain deductions and credits are limited or disallowed when filing separately.

Spit your business income after deductions, i.e. report net profit or loss on Form 8958. You will also have to split the deduction for self-employment tax and self-employment tax.

Learn more at Married Filing Separately in community property states.