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Self-Employment Tax on Aged Social Security Recipient

I'm retired and receiving Social Security payments along with taxable 401K withdrawals, pensions, etc. Last year I decided to do some part-time work as a consultant/attorney and received additional income of several thousand dollars. Business expenses related to the part-time work were minimal. I understand that I'm now required to pay Self Employment Taxes (about 15% of about 94% of the net part-time earnings). In addition, I understand that I have to add at least a portion of the net Self Employment Income to the total income reported on my personal (joint) income tax return. I understand that the amount to be added to my personal income for the year may be reduced by certain percentages, but I'm not clear on what these percentages are (50 percent?). - What is the percentage or amount I have to add to my gross personal income for the year, and where in the IRS regs should I look for discussions of this matter? Also, as with most retirees, the Government computed the payments we receive from Social Security several years ago when I retired, based on the totals I had paid in at the time of my retirement. - Now, as it turns out, I will be paying additional money into the Social Security and Medicare systems from the income from the part-time work. - Do I get any benefits from these additional payments into the SS/medicare system (such as an eventual increase in my SS checks), or will my additional payments simply amount to something of a "windfall" for the SS system? Last, are there any further deductions/exemptions/limitations I should investigate that might offset some of the increase in overall taxes, in view of the circumstances and the fact that I am currently a SS recipient? Could I rely on one of the advanced Turbotax programs to compute such a return correctly? Thanks for any suggestions.

Jim Cate

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Reply to
JimC
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You SUBTRACT 1/2 of the self-employment tax from gross income, not add it. Then, the actual self-employment tax is calculated on your Schedule C income less this deduction. Whether or not your benefits will increase depends on your earnings history. If you earn enough, after starting to draw your benefits, the monthly amount will be recalculated and increased. Unless you do extremely well in your second career, however, this won't happen. Your historical earnings are adjusted to current dollars and then the 35 highest years are averaged to determing the basis for calculation. So, unless you earn enough for the current income to replace an earlier high income year, the benefit will not increase. Lanny K. Williams, CPA Nawarat, Williams & Co., Ltd. Income Tax Services for Expatriate Americans

Reply to
L K Williams

Yes -- all of it.

The percentage to include is 100%. What did you read that lead you to believe you didn't have to include your entire profit in your gross income?

Depends. SS benefits are computed based on your 35 top earnings years. If you have less than 35 years of earnings, some of the 35 years in the calculation are zeroes. If your work turns a zero into a positive number or if your work replaces a small positive number with a larger one, your benefits will go up. Otherwise your benefits will be unchanged.

There are no special breaks for being a SS recipient.

-- Rich Carreiro snipped-for-privacy@animato.arlington.ma.us

Reply to
Rich Carreiro

Where a portion = all of it. You're thinking of the taxability of your Social Security, which depends on your total income (regardless of whether it was self-employment income or not). The worksheet to calculate it is in the

1040 instructions; any tax software should be capable of handling it correctly.

Actually, my understanding (from a Social Security speaker at continuing education) is that your benefits are recalculated every year, based on your highest 35 years to date. Whether your benefits increase or not will depend on whether this year replaces a lower-earning prior year.

Just make sure you've got all the business deductions you're entitled to. The rest is pretty mechanical.

It depends on whether you can rely on yourself to put the information in correctly. The situation you've described is common enough that any off-the-shelf software should get it right, assuming appropriate data entry. Phoebe :)

Reply to
Phoebe Roberts, EA

No further credit for social security taxes after you start a pension between age 62 to your legal retirement age [66 this year]. The current social security model assumes that a fraction of taxes will not accrue toward benefits due to early death, not working long enough, emigration, working after the base pension, etc. to contain benefit costs. That could change with private accounts, but unlike to affect anyone born before 1950.

Reply to
rick++

I'm in exactly your situation -- retired at age 65, collecting SS and other pensions, and also working part time as a university instructor and self-employed as a consultant. Because I had less than 35 total years of SS credit, I get a little upward adjustment in my Social Security every year. Doesn't amount to much, but it's better than nothing . And yes, you pay the self-employment tax (equivalent to both the employer's and employee's shares of Social Security and Medicare taxes), and you get to deduct half of the self-employment tax as an adjustment to income. That's kind of like the employer getting to deduct its share of SS and Medicare taxes. So you pay both halves, but you get to deduct the equivalent of the employer's half, just as the employer would if you were employed by someone else. If you work as an employee for someone else, you will be subject to the employee's share of SS and Medicare taxes as well. Katie in San Diego

Reply to
Katie

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