Say some of your income is by W-2 (taxes withheld), and part is by 1099-MISC (no taxes withheld).

If you put all of the 1099 money into an IRA, then you don't have to pay taxes on it at all, correct? (Well, except when you take it out, as per the regular IRA rules.) All this money would be working towards future savings and lowering your yearly taxes. Am I getting that right?

Practically speaking, one would only put part of the 1099 into the IRA because you need the rest for your normal expenses. But "sheltering" your 1099 earnings this way seems so obvious that I'm surprised I've never heard of it before. Is there something I'm missing?

UPDATE: Basically the answer is: getting money on 1099 will raise your year-end taxes (like all money you earn). Putting some of that money into the IRA will lower your year-end taxes. I specifically wondered how much you would have to put in to offset the increase, but that depends on a number of factors (mainly, how much you earn all year, and whether all this raising and lowering changes the tax bracket you're in.)

  • 1
    What kind of 1099 form are you asking about? 1099-MISC, DIV, INT, R, etc.
    – Michael
    Mar 31, 2017 at 21:11
  • MISC. Non-employee compensation, Independent contractor. I've edited the question. Good catch Mar 31, 2017 at 21:13
  • No worries, I thought so :) Please see my answer below.
    – Michael
    Mar 31, 2017 at 21:14

3 Answers 3


The 1099 income is subject to the same total limit on IRA deposits. If you are looking to shelter more than $5500, you might consider a Solo 401(k). It offers higher limits and other potential advantages.


Yes, you can deduct up to your Adjusted Gross Income (AGI) or your contribution limit, whichever is lower. Note that this reduces your taxable income, not your taxes. This is self-employment income, which is included as compensation for IRA purposes.

You still have to pay self-employment taxes (Social Security and Medicare) though. You pay those before calculating AGI. So this won't entirely shield your 1099 income from taxes, just from income taxes.

Note that if you have both W-2 and 1099-MISC income, you don't get to pick which gets "shielded" from taxes. It all gets mixed together in the same bucket. There may be additional limitations if you are covered by a retirement plan at work.

  • Do you know whether eligible contributions to an HSA (since they're asking about IRAs) would reduce self-employment tax liability? My intuition is yes, but quite a bit of Googling hasn't confirmed that.
    – Guest5
    Apr 1, 2017 at 3:12

There are many different types of 1099 forms. Since you are comparing it to a W-2, I'm assuming you are talking about a 1099-MISC form.

Independent contractor income

If you are a worker earning a salary or wage, your employer reports your annual earnings at year-end on Form W-2. However, if you are an independent contractor or self-employed you will receive a Form 1099-MISC from each client that pays you at least $600 during the tax year. For example, if you are a freelance writer, consultant or artist, you hire yourself out to individuals or companies on a contract basis. The income you receive from each job you take should be reported to you on Form 1099-MISC. When you prepare your tax return, the IRS requires you to report all of this income and pay income tax on it.

So even if you receive a 1099-MISC form, you are required to pay taxes on it.

  • Then I guess my question should be "will the deduction for contributing to the IRA offset the higher taxes you incurred by earning the extra money in the first place?" In other words, is it a indirect tax shelter? Mar 31, 2017 at 21:17
  • Roth or Traditional? Are you filing single? Married Filing Jointly? Married Filing Separately?
    – Michael
    Mar 31, 2017 at 21:19
  • My question is hypothetical since at present I make very little by 1099-MISC. Are those details really important? Mar 31, 2017 at 21:27
  • Roth IRAs are never deductible. Traditional IRAs are deductible, but you must meet several criteria. investopedia.com/ask/answers/081414/…
    – Michael
    Mar 31, 2017 at 21:29
  • OP asked about depositing to an IRA, your answer doesn't mention IRA Apr 1, 2017 at 2:05

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