A Factsheet from Social Security _______________________________________________________________ Social Security Administration SSA Publication No. 05-10022 January 1997 (Recycle prior editions) If You're Self-Employed The majority of people who pay into Social Security work for someone else. Their employer deducts Social Security taxes from their paycheck, matches that contribution, and sends wage reports and taxes to the Internal Revenue Service (IRS) and Social Security. But self-employed people must fill out the forms and pay the taxes directly to the government. This factsheet explains that process. You are self-employed if you operate a trade, business, or profession, either by yourself or as a partner. You report your earnings for Social Security when you file your federal income tax return. If your net earnings are $400 or more in a year, you must report your earnings on schedule SE. PAYING SOCIAL SECURITY AND MEDICARE TAXES The Social Security tax rate for 1997 is 15.3 percent (the same as 1996) on self-employment income up to $65,400. If your net earnings exceed $65,400, you continue to pay the Medicare portion of the Social Security tax, which is 2.9 percent, on the rest of your earnings. There are two income tax deductions that reduce your tax liability. The deductions are intended to make sure self-employed people are treated in much the same way as employers and employees for Social Security and income tax purposes. First, your net earnings from self-employment are reduced by an amount equal to half of your total self-employment tax. This is similar to the way employees are treated under the tax laws in that the employer's share of the Social Security tax is not considered income to the employee. Second, you can deduct half of your self-employment tax on the face of the IRS Form 1040 (line 25). This means the deduction is taken from your gross income in determining adjusted gross income. It cannot be an itemized deduction and must not be listed on your Schedule C. If you have wages as well as self-employment earnings, the tax on your wages is paid first. But this rule is important only if your total earnings are more than $65,400. For example, if you have $20,000 in wages and $30,000 in self-employment income in 1997, you pay the appropriate Social Security taxes on both your wages and business earnings. However, if your 1997 wages are $70,000 and you have $10,000 in net earnings from a business, you do NOT pay dual Social Security taxes on earnings above $65,400. Your employer will withhold 7.65 percent in Social Security taxes up to $65,400 and 1.45 percent (the Medicare portion of an employee's tax rate) on earnings between $65,400 and $70,000. And you must pay the 2.9 percent Medicare self-employment tax (not the full Social Security tax) on your $10,000 in self-employment earnings. EARNINGS CREDITS You need earnings credits to qualify for Social Security benefits. The number of credits you will need depends on your date of birth, but no one needs more than 40. You can earn up to four credits per year. If your net earnings are $2,680 or more, you earn four credits one for each $670. (If your net earnings are less than $670, you still may earn one or more credits by using the optional method described on the back of this factsheet.) All of your earnings covered by Social Security are used in figuring your Social Security benefit. So, it's important that you report all of your earnings up to the maximum as required by law. FIGURING YOUR NET EARNINGS Net earnings for Social Security are your gross earnings from your trade or business, minus all of your allowable business deductions and depreciation. Some income doesn't count for Social Security. Don't include the following in figuring your net earnings: * Dividends from shares of stock and interest on bonds, unless you receive them as a dealer in stocks and securities. * Interest from loans, unless your business is lending money. * Rentals from real estate, unless you are a real estate dealer or regularly provide services mostly for the convenience of the occupant. * Income received from a limited partnership. OPTIONAL METHOD If your actual net earnings are less than $400, your earnings can still count for Social Security under an optional method of reporting. The optional method can be used if your gross earn- ings are $600 or more or when your profit is less than $1,600. You can use the optional method NO MORE THAN FIVE TIMES. Your actual net must have been $400 or more in at least two of the last three years, and your net earnings must be less than two-thirds of your gross income. Here's how it works: * If your gross income from self-employment is between $600 and $2,400, you may report two-thirds of your gross OR your actual net earnings if $400 or more. * If your gross income is $2,400 or more and the actual net earnings are $1,600 or less, you report EITHER $1,600 OR your actual net. SPECIAL NOTE FOR FARMERS: If you're a farmer, you can use the optional reporting method every year. It's not necessary to have had actual net earnings of at least $400 in a preceding year. How To Report Earnings You must complete the following federal tax forms by April 15 following any year in which you have net earnings of $400 or more: * Form 1040 (U.S. Individual Income Tax Return) * Schedule C (Profit or Loss from Business) or Schedule F (Profit or Loss from Farming) as appropriate * Schedule SE (Self-Employment Tax) These forms can be obtained from the IRS and most banks and post offices. Send the tax return and schedules along with your self-employment tax to the IRS. Even if you don't owe any income tax, you must complete Form 1040 and Schedule SE to pay self-employment Social Security tax. This is true even if you already get Social Security benefits. CHURCH WORKERS If you are considered self-employed because of your work for a church or church-controlled organization, you must report earnings of $100 or more. For more information, ask Social Security for the factsheet "If You Work For A Nonprofit Organization" (Publication No. 05-10027). FAMILY BUSINESS ARRANGEMENTS Family members may operate a business together. A husband and a wife may be partners or running a joint venture. If you operate a business together as partners, you should each report your share of the business profits as net earnings on separate schedules, even if you file a joint income tax return. The amount each of you should report depends upon your agreement. __________________________________ Social Security's Toll-Free Number 1-800-772-1213 Call 24 hours a day, including weekends and holidays. To speak to a representative, call between 7 a.m. and 7 p.m. any business day. Internet: http://www.ssa.gov ---------- A Factsheet from Social Security _______________________________________________________________ Social Security Administration SSA Publication No. 05-10038 January 1997 (Recycle prior editions) When You Retire From Your Own Business: What Social Security Needs to Know If you own and operate a business and you're getting ready to retire, Social Security will need to know whether you'll be completely retired or whether you plan to continue some involvement in the business. To get all of your Social Security retirement benefits, you must retire, or at least reduce your 1997 earnings below $8,640 if you're under age 65, or below $13,500 if you are 65-69. If you reduce your earnings, you must also reduce your involvement in the business so that it corresponds with the amount of your earnings. When you work for wages, it's easy to determine whether you're retired. Your earnings tell the whole story. But when you work in a business that you or your family owns, or you are an officer in a corporation, it's not as simple. Because you could be in a position to control your earnings, you may need to furnish us with additional information--such as tax returns or corporate records--when you file for benefits. This will help us decide whether you have reduced your services in the business to match the reduction in your income. In other words, your earnings must match the work you do. You cannot simply pay yourself a smaller salary to stay under Social Security's earnings limits. This factsheet provides you with information on how we decide whether a person meets Social Security's definition of retirement and describes the types of evidence we need to make that decision. How Earnings Reduce Your Social Security Benefit In 1997, if you are under age 65, you can earn up to $8,640 and still receive full benefits. For every $2 you earn over this limit, $1 is withheld from your benefits. For people age 65 through 69, the 1997 earnings limit is $13,500. For every $3 you earn over this limit, $1 is withheld from your benefits. There is no earnings limit after you reach age 70. Are You Really Retired? When you apply for Social Security benefits, there are several situations requiring additional information and evidence to help us decide YOUR LEVEL OF RETIREMENT. For example, additional questions would be appropriate if you are -- * involved in a family business, or another family member is assuming some, or all, of your duties. * continuing to render services for the business at a reduced rate of compensation. * in a position to control your earnings in order to receive Social Security retirement benefits. * still the owner or part-owner of a business and own stock in the business. * splitting wages with others (dividing former salary between you and your spouse or children, for example). What Additional Evidence May Be Needed? In addition to the retirement benefit application, we'll ask you to tell us about your retirement plans. We also may ask you to complete a "Self-Employment/Corporate Officer Questionnaire" (Form SSA-4184) to provide us with information needed to determine whether you're retired. You also may be asked for additional documentation such as personal and business tax returns, corporate resolutions, stock transfer agreements, and resignations. We pay special attention to situations in which your salary has been reduced but you are compensated through another form of payment. These may include an increase in dividends, an increase in salary to another family member (with no change in responsibility), excessive rent or loan repayments, and unexplained business expenses. What We Count As Earnings When you continue to receive compensation, we consider the work you performed and the amount you earned while working and compare it with your work and earnings after retirement. We determine the reasonable value of the services you perform for the business, based on the time spent and nature of the services, and compare it to the income you receive. If we decide that the value of your services exceeds your income, we must determine a dollar amount for those services and count it against Social Security's annual earnings limits. Also, if we determine that you are not retired and that your earnings have been underreported, we have the right to adjust your Social Security earnings record. We also may notify the Internal Revenue Service so that it may determine whether your tax liability needs adjustment. An Example The following example describes a situation that would require an extensive interview and documentation because the person is retiring from a family business or corporation. Let's say Mr. Davenport owns and manages a furniture store and he is about to file for Social Security benefits. He decides to name his wife as manager even though he intends to continue to control and manage the business. We will need to compare his earnings to the level of work he performed before he named his wife manager. If we learn that his retirement is merely a paper transaction transferring earnings to his wife with no reduction in his services, we would adjust his earnings to reflect his involvement in the business and pay benefits based on those adjusted earnings. We would not suggest that Mr. Davenport completely discontinue his involvement with the business. Instead, we would remind him that if he wants to continue to work, the amount of his earnings must match the amount of work he does. Early Contact With Social Security Office Is Important You should check with us well before filing for benefits to make sure you are aware of the documentation you will need to furnish for the interview. Remember--you have to retire to collect retirement benefits--or at least significantly reduce your involvement in business and keep your earnings within the income range (explained on the front of this factsheet). That will permit us to pay some or all of your Social Security benefits. __________________________________ Social Security's Toll-Free Number 1-800-772-1213 Call 24 hours a day, including weekends and holidays. To speak to a representative, call between 7 a.m. and 7 p.m. any business day. Internet: http://www.ssa.gov