Is this considered “earned income” for Roth contribution
My 22 yr old son, accepted an offer as software engineer in 2023 to start in September 2023. He was contacted a few months before this start date and asked to push the start date back to March 2024 and compensated $13,000 for this delay. He received the $13,000 payment in October 2023 via Zelle, no taxes were withheld and a third part payer for Amazon issued him a 1099-MISC for him to file his taxes. He recently inquired what type of compensation this was since he had no paperwork and was told by Amazon HR that it was a “bonus.”
They have refused to revise the 1099 to a W2. My question–Is his income considered “earned income” since he contributed the full amount allowed ($6,500) to a Roth in December 2023 believing he would receive a W2 for his “bonus.” And had no other income during 2023.
Can it be considered “earned income” if he hadn’t started working for Amazon yet when it was issued. He did start working for them last mont,h March 2024, in the position he was hired for.
Permalink Submitted by Alan - IRA critic on Thu, 2024-04-11 18:30
This is not earned income for IRA purposes but he will not owe FICA taxes on it. If this was an employment related bonus, it would have been reported on a W-2 and therefore would have been earned income.
Permalink Submitted by Jane Gies on Sat, 2024-04-13 15:13
Thank you so much for your reply.
Since it’s not “earned income”, what does he do to correct the Roth contribution that he made and invested in stocks. It is my understanding that he cannot open a Traditional IRA and recharacterize the Roth to the TIRA as he doesn’t have “earned income” to qualify for that account as well.
He has an extension on tax filing until October 15th, 2024–while we are figuring out what to do. Would he just sell the stocks that were bought and remove the total amount–contribution and earnings and enter the earnings as income for tax purposes. Is there a special process so as not to be considered an early distribution with penalties? Also what tax year would the Roth undoing and earnings on the stocks sold be considered for –the original 2023 contribution or when it’s “reversed” in 2024??
Please advise. Thanks so much.