Self Employment and Social Security Benefits

[mountainsoft]

This may not apply to others and probably falls in the "Duh" category, but I didn't notice the connection until the last year or two.

I have been running my own business for over 25 years. I have never earned much, but always deducted as many business related expenses as I could to keep my taxes as low as possible. Advertising, Postage, Subscriptions, etc. This often resulted in a very low income after deducting expenses.

Over the last couple years I stopped advertising, and no longer deduct some expenses for the business. Some was to cut costs, others were just to start transitioning to handling the costs that will continue into retirement. Basically, I've just been trying to simplify things. Anyway, the result has been a higher self employment income on our tax return, even though my actual earnings have declined slightly.

What I didn't factor in was how Social Security uses your best 35 years when calculating your benefits. As my reported income has now gone up the last couple years, those are now part of my best 35 years, and I've seen my estimated benefits increase accordingly.

In other words, by trying to deduct as many business expenses as possible, I kept my reported income low, which will result in lower social security benefits. Long term it would have been smarter not to deduct so many of my business expenses. It would mean slightly higher taxes for the year, but higher SS benefits in retirement.

It's probably too late to make much difference now, but I still have a few years before we retire to apply this knowledge.

 

[Sunset]

Good point, and it's not all or nothing, as long as you have a certain amount of income to show SS, then a person can deduct away the rest.

I do the extremely odd work for $$ , and frankly it's too tiny to help me with SS earnings.... which annoys me, so the entire thing becomes a loss as I deduct it all the the negative amounts..

 

[aaronc879]

I'm not sure that's true. As a self employed person you have to pay both halfs of the FICA tax which means you pay over 15% on every dollar you earn after expenses. Even on my small SE income of around $15K/yr I have to pay $2250 on SE taxes in addition to a small amount in Federal and State taxes. If I didn't take deductions I would have more like $25K/yr and would pay an extra $1500 in SE tax. I doubt that would make a difference in SS payments I receive but it makes a noticeable difference now. I'm no tax expert but you should look into it to see what is actually better for your situation. Don't assume it's better to not take deductions.

 

[Philliefan33]

According to the IRS, you must report all income and expenses on the Schedule C. Under-reporting expenses is one way taxpayers commit fraud to increase EIC payments, so the IRS takes a closer look if you have self-employment income + EIC.

 

[Teacher Terry]

A friend of mine was a mobile groomer and didn’t report her income when people paid cash. Now her SS is only 750/month and she is upset.

 

[target2019]

One-half of self employment tax (Schedule 2) becomes part of adjustments to income (Schedule 1). So, we don't pay over 15% on the SE tax.

There are ways to legally show more profit. For example, instead of using Sec 179 for that Hummer, use the depreciation schedule.

 

[mountainsoft]

According to the IRS, you must report all income and expenses on the Schedule C. Under-reporting expenses is one way taxpayers commit fraud to increase EIC payments, so the IRS takes a closer look if you have self-employment income + EIC.

We don't qualify for Earned Income Credit, and I'm not "under" reporting expenses. I just stopped spending in some areas (advertising for instance), and pay others out of pocket I used to deduct as a business expense. I'm not doing anything to game the tax system, I just noticed the change in my SS estimations after a couple years of lower deductions. Granted, it's not a huge change, but I'll be getting so little from SS that any difference is welcomed.

 

[Sunset]

According to the IRS, you must report all income and expenses on the Schedule C. Under-reporting expenses is one way taxpayers commit fraud to increase EIC payments, so the IRS takes a closer look if you have self-employment income + EIC.

If you don't claim for EIC, then a person can skip taking deductions.

I've never had the IRS come to me and tell me to pay less tax by claiming more deductions, usually I miss a deduction and they still don't tell me how to save on taxes by claiming it.

You must report all income, claiming expenses is a lot more voluntary as many are not clearcut.

 

[mountainsoft]

I'm not sure that's true. As a self employed person you have to pay both halfs of the FICA tax which means you pay over 15% on every dollar you earn after expenses. Even on my small SE income of around $15K/yr I have to pay $2250 on SE taxes in addition to a small amount in Federal and State taxes. If I didn't take deductions I would have more like $25K/yr and would pay an extra $1500 in SE tax. I doubt that would make a difference in SS payments I receive but it makes a noticeable difference now. I'm no tax expert but you should look into it to see what is actually better for your situation. Don't assume it's better to not take deductions.

I'm not doing anything specifically for tax or SS purposes. Business has been slowly declining over the last few years so I've been trying to cut costs wherever I can. Generally I'm just trying to simplify. The increase in estimated SS benefits was just a happy surprise.

 

[gayl]

My eldest sister always managed to write off her income and lives on whatever the minimal SSA is. And goes back to work at 70. [emoji17]

 

[jkern]

Using your expenses to reduce your taxable income will yield a higher net income. If you were to save and invest that additional income over 20, 30 or 40 years, the larger nest egg should more than make up for the smaller SS check.

 

[Sunset]

Using your expenses to reduce your taxable income will yield a higher net income. If you were to save and invest that additional income over 20, 30 or 40 years, the larger nest egg should more than make up for the smaller SS check.

Many folks don't.
They think they are smart, not paying taxes, working under the table, and enjoy life.
Then are shocked when SS pays little to them..

I think of it as justice.

 

[Stormy Kromer]

I was self employed for 32 years and paid the max into SS for all but the first couple years. I'm very satisfied with the estimated SS benefits in the future.


I understand where you're coming from with the expenses, a business owner can choose to spend a lot on deductible items and it lowers your tax liability. I see business owners that spend a lot on discretionary expenses (vehicles mostly) and defend it by saying "It's deductible!"


On a related note, most businesses that are sold are valued on their net income. So a business that takes on more expenses isn't going to be worth as much as one that runs leaner and shows more net income. It is also a lot easier to obtain bank credit when your business shows more net income.


Glad things are working out well for you.

 

[jkern]

Many folks don't.
They think they are smart, not paying taxes, working under the table, and enjoy life.
Then are shocked when SS pays little to them..

I think of it as justice.

So true!!! The saving and investing the extra income is hypothetical. Unfortunately, very few do and I know some who spent every dime and now live on a small SS check.

 

[mountainsoft]

Using your expenses to reduce your taxable income will yield a higher net income. If you were to save and invest that additional income over 20, 30 or 40 years, the larger nest egg should more than make up for the smaller SS check.

Sadly, that's all hindsight. I don't have 20-40 years. We're planning to retire in 3-4 years and start SS in 8-10. At this point there aren't many changes that will have much effect other than trying to save as much as possible. Even then we only have so much extra we can save.

The common retiree regret.... If only I had started sooner.

 

[MRG]

Many folks don't.
They think they are smart, not paying taxes, working under the table, and enjoy life.
Then are shocked when SS pays little to them..

I think of it as justice.

+1

I've known two people who did stuff under the table. One understand what he was trading off the other was very surprised and then took their benefits at 62. [emoji848]

 

[socca]

Using your expenses to reduce your taxable income will yield a higher net income. If you were to save and invest that additional income over 20, 30 or 40 years, the larger nest egg should more than make up for the smaller SS check.

Nope: higher business expenses reported => lower business net income reported => lower Schedule C tax liability => more money for the OP to save/invest.

I don't recommend that the OP try to keep two sets of books: (1) actual business expenses incurred, and (2) what was reported to the IRS. An IRS auditor might not be pleased.

My retirement planning treats Social Security as a 'nice to have' rather than a 'must have', so trying to finagle my books to maximize a hypothetical SS payoff many years down the road just isn't worth it. With American Grasshoppers swarming all over the landscape, I suspect that politicians may eventually decide that we Ants can afford to lose some or all of our SS payments.

 

[donheff]

I had a very talented handyman that worked for me for years. For a while he kept everything under the table but I cautioned him to at least cover the minimum to get his quarters in for SS. It seems worth while to do the analysis needed to discover whether declaring more could be a net positive despite the extra taxes.

 

[jim584672]

Some lady I know says her husband was "off the books" and didn't pay taxes. He is gone and she gets next to nothing in Social Security now. Not feeling sorry for her really.

 

[mountainsoft]

I've known two people who did stuff under the table.

I'm really surprised how many people are looking at this as some kind of shady deal. I'm not hiding anything, or trying to game the system in any way. I report everything I earn, as well as my business related expenses. I simply cut back on my expenses and noticed the increase in benefits due to a higher net income. Heck, I'm probably entitled to many deductions I never take, use of a home office, depreciation of office equipment, etc.

 

[bingybear]

One has to be careful with really low income reporting (actual or engineered). You need so many quarters above a prescribed amount to qualified for basic medicare.


OP -- and yes it a Duh or DOH!

 

[donheff]

I'm really surprised how many people are looking at this as some kind of shady deal. I'm not hiding anything, or trying to game the system in any way. I report everything I earn, as well as my business related expenses. I simply cut back on my expenses and noticed the increase in benefits due to a higher net income. Heck, I'm probably entitled to many deductions I never take, use of a home office, depreciation of office equipment, etc.

I don't think many or maybe anyone is casting aspersions on you for doing this analysis. It sounds like most of our comments about the "off the table" people was that they made the wrong decision to avoid taxes. It seems clear to me that you are making a prudent decision to legally forgo a few potential deductions to ensure the most long term return on taxes - a prudent approach and just as legal as taking every deduction you can arguably justify.

 

[Sunset]

I'm really surprised how many people are looking at this as some kind of shady deal. I'm not hiding anything, or trying to game the system in any way. I report everything I earn, as well as my business related expenses. I simply cut back on my expenses and noticed the increase in benefits due to a higher net income. Heck, I'm probably entitled to many deductions I never take, use of a home office, depreciation of office equipment, etc.

Not shady at all.

My comments were intended to be more generic about income reporting and deductions taken, that is how I'm seeing most of the other comments as well.

Heck, I take the simple office deduction of the flat amount.
Rather than list 4-5 different things and estimate my personal use of each multiplied by the sq footage of the office to house size (which even my ins. company cannot agree upon). Because it's not worth my time to spend 4 hours figuring it out, especially because if the IRS questions it, then I have to spend another 15 hours proving it to them.

 

[Teacher Terry]

MS, the very last word I would use to describe you is shady. You seem like a very forthright person.

 

[mountainsoft]

My comments were intended to be more generic about income reporting and deductions taken, that is how I'm seeing most of the other comments as well.

No worries. I obviously misinterpreted what people were saying.