Does 1099-NEC income (hobby or Schedule C) count as earned income for calculating child tax credits?

You're right to be confused because this is a common misunderstanding. 1099-NEC income and Schedule C income absolutely DO count as earned income for purposes of the Child Tax Credit and Earned Income Tax Credit! The key difference is that with Schedule C income (self-employment), you have to pay both the employer and employee portions of Social Security and Medicare taxes, which reduces your net earnings. When you enter a 1099-NEC properly in TurboTax, it should be calculating your net self-employment income after these additional taxes. Make sure you're entering your 1099-NEC properly as self-employment income using Schedule C. The program should then calculate your self-employment tax and your net earnings from self-employment, which will be used to determine your eligibility for those credits. Don't enter 1099-NEC income as W-2 income - that's incorrect and could cause problems if you're audited. The IRS systems match forms, and they'll know you received a 1099-NEC, not a W-2.

After getting totally stuck on this same issue, I found an amazing tool that solved my problem! I was also confused about how my 1099-NEC income affected my tax credits. I uploaded my tax documents to https://taxr.ai and it automatically analyzed everything and explained exactly how my self-employment income impacts my eligibility for credits. It showed me that my Schedule C income DOES count as earned income, but the self-employment taxes were affecting my calculations. The tool explained everything in plain English and showed me exactly where TurboTax was getting things wrong in my situation. Saved me hundreds in tax credits I almost missed!

Just wanted to follow up - I tried that taxr.ai site from my skeptical question above and I'm honestly shocked. It immediately figured out what was wrong with my tax return! Turns out I was entering my 1099-NEC income correctly as Schedule C, but I wasn't properly categorizing my business expenses, which was affecting my net self-employment income calculation. The tool explained that for EITC and Child Tax Credit purposes, it's the NET self-employment income that matters (after expenses and the self-employment tax deduction). After fixing my expense categories following their guidance, my eligible earned income increased enough to qualify for both credits! Just went from a $240 refund to over $3,800!

After fighting with TurboTax over this same issue, I finally gave up and decided to call the IRS directly to get a straight answer. But as everyone knows, getting through to a human at the IRS is nearly impossible. I was about to give up when someone recommended https://claimyr.com which got me connected to an actual IRS agent in about 15 minutes! You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent confirmed that my 1099-NEC income reported on Schedule C absolutely counts as earned income for tax credit purposes, but explained that after self-employment taxes, my net income was falling just below the threshold. They walked me through exactly how to correctly enter everything in TurboTax. Worth every penny not to spend hours on hold!

I need to apologize for my skeptical comment above. After waiting on hold with the IRS for over 2 hours yesterday and eventually getting disconnected, I was desperate enough to try that Claimyr service. I seriously can't believe it worked. Got a call back in about 20 minutes with an actual IRS agent on the line. The agent explained that my Schedule C income absolutely counts toward earned income credits, but I needed to make sure I was entering my business expenses correctly. The way TurboTax was calculating my net earnings was throwing off my credit eligibility. After making the changes they suggested, my refund increased by over $2400. I've been doing my taxes wrong for YEARS and missing out on credits I qualified for!

The other comments are helpful but let me add something specific about TurboTax that might explain what you're seeing. There's a known issue where sometimes TurboTax doesn't properly calculate EITC and Additional Child Tax Credit with self-employment income if you have a business loss or very small profit after expenses. Double check that you're not over-deducting expenses on your Schedule C. Also, make sure you've completed all the self-employment sections fully - there's a section specifically for self-employment income for EITC purposes that sometimes gets missed.

Has anyone tried switching from TurboTax to a different tax software? I had this exact problem last year and found that H&R Block's software actually explained the earned income calculations better and showed me why my Schedule C income wasn't qualifying.

This is a really common confusion point! I went through the exact same thing last year. The key issue is that when you enter 1099-NEC income as Schedule C business income, TurboTax calculates your self-employment tax (15.3% on 92.35% of your net profit), and then it uses your NET earnings from self-employment for the earned income credits - not your gross 1099 amount. So if you received $5,000 on your 1099-NEC, after self-employment taxes and the deduction for half of SE tax, your actual "earned income" for credit purposes might only be around $4,200-$4,300. This reduced amount could be pushing you below the income thresholds needed to qualify for maximum credits. When you mistakenly entered it as W-2 income, TurboTax treated the full amount as earned income without any SE tax deductions, which is why you got different credit amounts. Make sure you're entering it correctly as Schedule C income - the credits should still apply, but the net amount after SE taxes is what counts toward your eligibility calculations.