Early Social Security: A way around the earnings limit
Social Security allows you to start receiving benefits at one of three ages: at 62, at about 65, or at 70. The longer you delay the more you appear to be earning. This results from an actuarial calculation. A flat amount is designated for each American who reaches old age; the older you are, the more you receive monthly—the reasonable assumption being that the older you are, the fewer years you will have to receive your designated cache of dollars.
About three-fourths of Americans start their benefits “early,” at age 62. Many can do so because they have enough savings to live on, or are close enough that a small Social Security payment will get them out of the salt mine. Others are faced with life circumstances, such as layoffs or sickness, that force them to take the money early. And because the government has been slowly pushing back the age of so-called “full” retirement, for many of us that age comes well past the time we feel we should no longer have to work. In my case, “full” retirement doesn’t come until age 66.
If you take so-called “early” retirement—that is, you choose to start drawing benefits at 62—you get a reduced amount. If you wait until age 70, you get a significantly larger benefit. For example, in my case the difference between starting Social Security now and waiting until age 70 would amount to $1,029 a month. The difference if I waited until age 66 would be about $300 a month…enough to ensure that I wouldn’t have to teach one (count it, one) of six freshman comp courses a year to survive.
To discourage people from drawing their benefits at the earliest possible age, Social Security penalizes you for working. Until you reach “full” retirement age, every two dollars you earn above $14,160 results in a dollar confiscated from your benefits. Since neither my $13,944 Social Security benefit (gross: after-tax would be around $11,400) or a gross of $14,160 is enough to live on, this represents a very big problem. Given the ambient ageism that infests American society plus the practical problems entailed in hiring older workers, the likelihood that I will get a full-time job at 64 is almost nil. So I’m faced with two years of poverty (or having to draw down 7 or 8 percent of savings!) before I can start earning enough to live on, and by then my sources of freelance income will have dried up.
As it develops, however, there’s a work-around for the self-employed. It’s called incorporation. The proceeds of an S-corporation do not register for Social Security purposes. This is not true for a C-corp. Here’s how my tax lawyer explains it:
An S corporation is a pass-through entity whose income is taxed directly to the shareholders. In that respect it is like a partnership. The difference, however, is that S corporation income is not subject to self-employment tax (as it would be in a partnership or Schedule C (sole proprietor)). Therefore, S corporation income is not considered to be “earnings” for Social Security purposes.
However, as a more-than-5% owner of an S corporation, if you are also an officer (which you would be), you are required to take “reasonable compensation” (W-2 wages) for your duties as an officer of the corporation. Right now, it is the only way IRS can assess FICA/Medicare in an S corporation. If you do not take reasonable salary, IRS will attempt to assess FICA/Medicare on your total withdrawals (and perhaps the total income) of the S corporation. They will assess whatever they can get away with. The reasonableness of the salary depends on the total income of the corporation.
In other words, you can have self-employed income flow into an S-corporation and then have the corporation pay you in salary and dividends. Not only do you get around the $14,600 earnings limitation, you don’t have to pay the usual double dose of FICA levied on self-employed workers.
So, the solution is to form an S-corp that will function as an umbrella for the several sources of freelance income that trickle into my bank account: The Copyeditor’s Desk, HW&E (my original freelance entity, separate from the partnership with Tina), and Funny about Money. None of these will earn much, but taken together the proceeds could at least cut down the number of freshman comp courses I’ll have to teach. That will improve the quality of my life by several orders of magnitude.
A person who runs a business that makes a decent income could profit nicely from this strategy.
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[...] laid off your day job. Having the experience and contacts in teaching and editing will allow me to ramp up both those enterprises in my coming enforced retirement, and, as we have seen, will support me in the manner to which I [...]
re social security disability:
i’m 59 & disabled.
is there a way around not being able to earn money until age 66 when switched to soc security retirement?
thx?
I’m not a lawyer or a tax accountant, and so you should ask one of those to find out what would work for you. All I know is that my lawyer told me that if you have a business, as I do, incorporating as an S-corporation allows you to take an income from the business without affecting Social Security. That advice is worth what you paid for it.
Hard to find someone who knows Incorporation and ssdi. Know anyone who can connect me w/ a professional who knows both and able to work in Calif?
Thanks for any suggestions
@NOPD: Sorry…I don’t know a soul in California anymore. Try your state and county bar associations — they usually have referral systems.
I have just applied for Early Retirement. I was the Pres of a small “C” Corp. I have left that position and my Daughter has taken my place. I do not want to fill out the SSA-4184 form incorrectly.
Will there be a problem for me if I continue to draw a salary for this same corp?
If I want to do an “S” Corp should I form it after I start receiving SS?
@ Ron Beck: I have no idea! You need to speak with a tax accountant or a tax lawyer. From what I’m told, any income from which FICA and Medicare are withheld counts as earned income against Social Security. But I’m neither a lawyer nor an accountant, and so you shouldn’t believe a thing I say.
I wanted to know if its possible to retire earlier than 62 . .I have arthritis so i was wondering about disability benefits . . I plan to retire outside of USA because my benefits aren’t enough to survive here . . What will i need to do ?
@ g: To find out about disability benefits, call the Social Security Administration. Google Social Security and the site will come up; you’ll find a telephone number there. So far every time I’ve called there, I’ve reached live human beings who seem to be quite knowledgeable.
An alternative is to go in person to the Social Security office near you. You can make an appointment by calling a number at the SSA’s site, or you can simply go in and sit and wait until someone can see you.
There are organizations of retired expats in many countries. Google “retire abroad,” and also try googling “retire in _______” and fill in the blank with the country you’re interested in. If you plan to buy a place, google “real estate ___________” and fill in the city or region where you’d like to live.
I turn 62 in October and I filed on line for early SS.
We have a S-corp and I have a part time job (w-2)
SS wanted the last two years of our tax returns both personal and Corp and they are going over it with a fine tooth comb.
Oh, our total income on our 1040 last year was under $50K so it’s not like we are making a ton of money, but they are so suspicious.
You are talking about DOP’s here.
We do 50/50 (w-2-dop on the K-1)
Perhaps you could explain it better.
@ George: I’ve been very careful to put only business-related income in the S-corp and to spend funds only on items directly related to the business (for example, the computer and pay for my editorial subcontractor). They probably have gotten wise to the use of the S-corp as a way to shelter freelance income. But I think if you’re not using it to pay for your vacation in Disneyland or some such shenanigan, you should be OK. I tend to be extremely conservative when it comes to income tax issues.
The only thing that might be questioned, I think, is expenditure for motion-sensitive security lights in the front of the house. But with the current spate of burglaries, that’s a reasonable cost, especially given that the only seriously vulnerable entry to the office, which is secured by a solid-core door and a special lock, is the front window. We have had a lot of break-ins, and I think it would be hard to argue that the business should not spend $115 on extra security against thieves, given that the entire business and all its assets are in the room whose window is directly beneath those security lights.
@ George: I don’t know what a DOP. This kind of jargon is utterly incomprehensible to me. It’s like trying to understand Early Martian. That’s why I have to hire a tax lawyer to do my tax returns.
OK, looks I am one step above you on this S-Corp thing.
A DOP is distribution of profits.
Income tax is involved but FICA and Medicare are not withheld on a DOP.
DOP is reported on the K-1 from of the the 1120 S-Corp form.
The slant in your original post lead me to believe income from as S-Corp was not counted by SS once you retired.
If it’s reported on a W-2 they can dock you if you go over their silly limit.
Now the DOP’s. I say no but the SS people want the extra $5 I get for mowing some ones lawn.
It’s crazy as they don’t follow their own rules.
So now does the DOP issue make sense?
I mean that’s why we set up our corp as an S-Corp, a pass thru and we could do 50% on the w-2 and 50% on the dop and save some taxes.
In my mind if the DOP doesn’t contribute to FICA or MED, it’s like a draw from a pool.
As for security, we deduct our GSD’s food (German Shepherd Dog) and vet bills as security and this has never been questioned by the IRS.
@ George: Oh, I see. Yes — the tax lawyer and also my lawyer ex-husband, who has his practice set up as an S-corp, both say that these distributions are seen as dividends. Thus they do not count as earned income.
However, I have not attempted to withdraw those “dividends.” I pay myself a salary, as required, from the S-corp but let the rest of the money reside in the S-corp’s checking account. Unless I’m absolutely forced to it — and at this point it doesn’t look like I will be — I will not withdraw those funds until 2011, when I can earn as much as anyone will pay me. The only way I will spend any of that money is on items that are very clearly related to business operations… And most certainly not on dog food and vet bills.
That’s very original, George. Unless you own a junkyard, how do you get away with deducting the junkyard dog’s living expenses?
Reminds me of SDXB. His second house here in Phoenix had a yard with a half-dozen citrus trees. He discovered this qualified as agricultural property if he tried to sell the produce. (Yes. Really.) So in the spring he and his wife would peddle grapefruit from the driveway, making a few bucks here and there, and then he would take advantage of a whole slew of tax breaks.
Uhm. Yes. He was audited. He got away with that one, but the IRS wouldn’t put up with his attempt to write off tuition for parochial high school as “child care.”
We eat our own. Citrus and pomegranets.