Can a Referral Fee be Contributed to Roth IRA?

[Mo Money]

Hello all --

For those tax and IRA whizzes out there:

In 2019, I received a $6,500 referral fee from a personal injury lawyer for referring him a client. That matter settled, and the lawyer sent me the fee. I paid an amount approximating my estimated taxes on the $6,500 to the IRS and my state.

(For those wondering, I am permitted by law to received such a fee, because though I am retired, I remain a licensed attorney. Generally, my state bars non-lawyers from receiving such fees.)

A couple of months ago, I got a Form 1099 from the personal injury attorney reflecting the $6,500 payment.

The Question: Can I contribute the full $6,500 to my Roth IRA? I am over 55, and the 2019 Roth IRA contribution limit is $7,000. I'm wondering whether this type of referral fee income is eligible for a Roth contribution.

I had no other earned income in 2019. Keep in mind that theoretically, some of that $6,500 was paid in taxes already, but I'm not sure that's a bar to contributing the full $6,500 amount.

Thanks in advance for the input. Much wisdom to be found here...

 

[38Chevy454]

Since the 1099 is for income received, I think you can put the full $6500 into Roth. The 1099 doesn't specify what you did, just the amount received. Far as government concerned, it was for work performed.

Doesn't matter that you paid tax on the money, it's the gross amount you can put into Roth up to limit of work paid or $7000 in your age group. So in your case the $6500 is the limit.

 

[SecondCor521]

I believe it depends on whether you elect to treat the fee as business income or hobby income.

If you treat it as business income, then you'll report the $6500 on your Schedule C and it is considered earned income and thus can be the basis for a contribution to your Roth. You will also pay self-employment taxes on that income.

If you treat it as hobby income, then you'll report the $6500 as Other Income on Schedule 1 line 8; in this case it is not considered earned income and does not qualify you for a Roth contribution. You would not pay self-employment taxes on the income in this case.

You can make a Roth IRA contribution for tax year 2019 up through the filing deadline for 2019, which has been extended to July 15th this year due to corona virus.

 

[pb4uski]

You can contribute any earned income up to the contribution limit to a Roth or deductible IRA.

However, I'm not sure that what you describe is earned income since from what your wrote it does not sound like it was.would be reported on a Schedule C and that you paid self-employment taxes on any net income from the Schedule C.

I would say that it is probably not related to a trade or business so therefore not Schedule C and therefore not self-employment tax and not earned income... and therefore no IRA contribution.

But if you are keen to contribute it to the Roth I think you probably could by reporting it on Schedule C and paying any self-employment tax... I doubt that the IRS would object.

Also see https://www.journalofaccountancy.com/issues/2009/jul/20091639.html

ETA: Cross-posted with SecondCor521.

 

[Sunset]

Not an accountant,

But if I was going to count it on Schedule C as income, I'd be sure to take a few deductions along the way as well, besides the self-employment taxes that would need to be paid.

 

[Mo Money]

Thanks so much for the input, folks. Appreciate it.