"earned income" for Roth contribution calculation | Ed Slott and Company, LLC

"earned income" for Roth contribution calculation

How does one calculate the amount he could contribute to a Roth when the contributor's gross earned income was $3,000 and he had $1,000 in expenses for a "net" earned income of $2,000? This is the case with a high school student who had a business mowing lawns and could take the deductions but wants to maximize his Roth contribution for 2010. Could he contribute $3,000? Pub 590 says; What Is Compensation? ... Self-employment income. If you are self-employed (a sole proprietor or a partner), compensation is the net earnings from your trade or business (provided your personal services are a material income-producing factor) reduced by the total of: • The deduction for contributions made on your behalf to retirement plans, and • The deduction allowed for one-half of your self-employment taxes. Compensation includes earnings from self-employment even if they are not subject to self-employment tax because of your religious beliefs. but doesn't differentiate between "taxable compensation" as pre or post deductions etc.

The frame of reference comes from Sch C and SE. Net earnings from SE is shown on line 4 of Sch SE. Sch C starts with the gross income and is where expenses such as gasoline and repairs would be deducted to get to the net profit figure. If he opted not to claim his expenses, it would increase his SE taxes unless the gross income was small. But it would result in more net earnings from which a Roth contribution could be made. The two deductions you posted must be subtracted after the Sch SE figure as well to get to the taxable compensation figure. The Roth contribution cannot exceed the taxable compensation figure.

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