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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 when you start collecting, 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. A w4 estimator can help do the math for you. 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.

85 thoughts on “Early Social Security: A way around the earnings limit”

  1. 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?

    • 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. 🙂

  2. 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.

  3. 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.

  4. 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.

  5. 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.

    • @ 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.

  6. 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 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.

  7. 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.

  8. 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.

  9. @ 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.” 😀

    • You can work without being penalized after you reach “full” retirement age. This age depends on your present age. In my cohort, it’s 66.

      You can claim Social Security at age 62, but if you do, a) your benefit will be reduced proportionate to the amount you earn (but over time, it will increase your post-“full” retirement age benefit), and b) the amount you will draw down will be significantly less that you would get if you waited until “full” retirement age.

      As you can see, baby boomers who have lost their jobs at an age where it’s difficult or impossible to get a new job and highly unlikely that any work they can get will pay what they were earning pre-layoff are put in a very bad situation. Many of us have been forced to start drawing SS long before we planned to do so.

  10. Also keep in mind that if you are self employed or working under a S-Corp the SS people are going to look at the number of hours you work at your business.

    The benefit of an S-Corp is that you can pay yourself a salary and also pay yourself a Distribution of Profits (dividend that the SS people don’t count as salary/wages). We have been doing a 50/50 split for years

    15 hours per month or less and you are retired. 15 to 45 and they will evaluate (scrutinize) you.
    Over 45 hours per month and they deem you not retired even if you are making less than the monthly limit. <– How work affects your benefits.

  11. what if they deem that you are working too many hours
    and are not retired. How are you penalized if you filed
    a S corporation and took early retirement social security?

    • The rule doesn’t apply to earnings by an S-corp. The corporation is earning, I’m not. To the extent I paid myself a salary in 2011, it was not for hours worked: it was for my function as the corporation’s CEO.

      My year of trial is now over, and I’m finally old enough to earn as much as I like. Nothing happened: the editorial work was counted as the S-corp’s revenues, not my earnings.

      I did get penalized because the amount the college paid me for taking a summer workshop unexpectedly pushed me over the limit, despite all my careful scheming to avoid that. Social Security took away an entire month’s payment. However, to my astonishment, the result of this transaction was to increase my benefit!!!!! All of a sudden my net went from $957 to $1021. I thought they’d made a mistake. Went in person to ask how to fix it and was told the money counted toward my benefit and that somehow because they withheld a month’s pay my benefit amount was recalculated. So…in 2012, when other people got no, zero, ZIP cost-of-living increase, my income went up by $60 a month.

  12. Hi…
    This sounds great, but how do I report the S corp pass through income on the K1 without it flowing through to the 1040 as income that impacts the SS calculations? The software I use (ATX) pulls the K1 income into the calculation whether it shows up as dividend income on line 9 of the 1040 or line 17 as S corp income.

    Want to make sure I understand this before I put it in motion.


    • That’s something for an accountant to answer. So far I have not had to take salary income from the S-corp, because I’ve been able to just scrabble by on other sources, more or less. The S-corp pays expenses that realistically are legitimate costs of doing business — the high-speed Internet connection, for example, and office expenses.

      If you can’t afford an accountant, then you probably should drop by an IRS office and speak with a representative there.

  13. @Ray
    The Mrs. prints a P&L from Quickbooks and we take that to the accountant. She does the 1020 (S-Corp tax return) and works up the K-1.

    S-Corps don’t have to pay takes, the shareholders do reported on their 1040.

    The DOP (dividend) that you can pay yourself is not counted by SS as you only have to pay income tax on that amount, no FICA or Medicare.

    50% salary and 50% DOP is what we do.

    I would also advise sitting down with an accountant to go over everything.

    • Good advice George – the accountant thing – There are some really misinformed people here with dangerous comments/advice.

      I really like the advice above of going in to talk to an IRS employee, or calling the SS folks – the IRS/SS definitely have your best interests in their hearts! NOT.

      You get what you pay for!

      • No need to be rude about it, Peter.

        Besides, you do pay for the IRS: it’s called “taxes.” It is true that many of their clerks have no idea what they’re talking about. But at least if you can get their advice in writing you have something to present at an appeal.

  14. The IRS has been helpful when I had to call them with a question.

    Getting to SS was a pain because I feel they are suspicious that you are trying to cheat them

    I haven’t had to contact them since I got my first deposit into our checking account. They did dump another extra $580 deposit followed by a letter stating that they underpaid me based on my income.

    This year I am making less than I expected so I expect they will adjust again in 2012.

  15. @Gail

    If you work more than 45 hours per month SS could determine that you are not really retired and it makes no difference if you are employed by Acme Inc. or your S-Corp.

    I’m sure that will provoke another question.

    We chose an S-Corp as it avoids double taxation in a C-Corp. The S-corp is a pass through meaning the S-Corp pays all the expenses and what is left goes to the shareholders (employees, officers) as salary or dividends. The ideal situation is the S- Corp ends up with a small amount of money at the end of it’s fiscal year.

    • Good thought. Experience with SS customer service agents met over the phone suggests that in general with talking with government employees one should get and keep evidence of what was said.

  16. Hi Funny.

    I have yet another question related to the income of the S Corporation not being counted as earned income. It makes sense to me that the dividend portion would not be counted. However, it would seem that the ‘reasonable salary’ that you receive would be counted as earned income for social security purposes. Clearly you are saying it is not. Could you say more about the basis for that conclusion? Do you have any SS documents online that might verify this?

    Thanks. Michael

    • @ Michael: No, that’s not correct. If I appeared to be saying that “reasonable salary” disbursed by the corporation to its officers is not counted as earned income, then I gave the wrong impression.

      Of course, the corporation’s salary to its officers and employees counts as earned income for Social Security purposes. FICA and federal & state taxes are withheld.

      In my first year of unemployment, my tax lawyer decided that I was not required to take any drawdown or salary from The Copyeditor’s Desk, because (as I understood her) the corporation did not earn enough to require that.

      Because my salary as a contract adjunct instructor bumped up against the SS income limit, even the 10 grand the corporation earned would have put me afoul of that limit, if I the little enterprise had been organized as a sole proprietorship. But because we incorporated it as a pass-through entity and because it did not pay me a salary in that year, the harm caused by running a (literally!!!) a few dollars over the limitation was contained to one month.

  17. You would be placed in a questionable status. “Is this man retired or not?” Back in the 80’s there was no earnings limitation because you would have to show no earnings at all to collect. Believe it or not now with an earnings limit it is less strict because your able to work some (very little) and collect.

  18. I’m receiving SS disability. Can I form an S-corportation and have the money earned from working for someone else flow into it? Would this also provide an umbrella so I don’t have to limit my earned income?

    • @ Dan: Not knowing your circumstances, I couldn’t even begin to speculate. You need to consult a tax accountant or a lawyer. I’m neither of those.

    • @Dan, NO. If the check is made out to you it goes into your bank account.

      On the other paw you could form a living trust and add your bank account into that trust and that is complicated and you would need a financial planner to ask you what your plans are.

  19. I am a realtor, age 64 who began taking Social Security benefits at age 62 because of a need for income. I’m about to receive several settlements this year which will take me over my $14,160 limit. I’ m considering forming an S Corp in order to take a monthly salary which will keep my income within the prescribed limit. If I do not take more than the alloted salary until age 67, leaving the balance in my S Corp checking account until I can make as much as I want, will this be a problem with the IRS?

    • @ Linda: I was told that as long as I withdrew a “reasonable” salary (and the definition of that is vague), I did not have to take all of the corporation’s revenues out in a given year. However, a “settlement” doesn’t sound like earned income. Social Security isn’t looking at, say, insurance reimbursements, investment dividends, or lawsuit settlements; earned income (the stuff that FICA is withheld from) is what counts against you. But I AM NOT AN ACCOUNTANT! Really, you must discuss this with a tax accountant. That is the only way to get a credible answer to your questions.

  20. @Linda
    Your settlements are likely made out to you. You have to sign the check.
    Forming an S-Corp will not help at this point.

    Once you sign the check it goes in your bank account.
    It would be fruitless to transfer that money to an S-Corp that you set up because once you touched the money it goes on your 1040.

    Also an S-Corp is a pass through instrument, meaning the S-Corp pays no taxes. If you leave a lot of money in the S-Corp’s bank account the IRS will find it and be very suspicious.

    The benefit of the S-Corp is you can take a a draw that you only have to pay taxes on, no Fica or medicare.
    If you are on SS that draw does NOT count towards your income.

    To learn more about S-Corps:

    On the other paw if you won a lottery you are an unknown until you present the ticket.

    If you are so lucky, set up a trust and the money can sit in there and just let it ruminate until you take it out. The IRS can’t touch it.

    Me, we have our business as an S-Corp.

    I worked in a boiler room incorporation shop for a few months and that’s where I learned what I know.

    You didn’t say how large your settlements were, but if they are bigger than a breadbox go find a financial advisor.

    • Exactly so. It’s important to bear in mind that any income credited toward the S-corp has to have been earned by the S-corp; i.e., it has to be business income. If a check is made out to you personally, the bank will not deposit it in your S-corp’s account.

  21. What ssa is looking for is earned income. So receiving money other than a 9 to 5 job will not be counted against that yearly limit. The s or c corp is not always a good idea because It can cause you to go into what is called a questionable retirement. This means they suspend benefits until they figure out what is going on since with a corp you can write your own w2’s. Back in the early 80’s in order to collect anything at all you would have to be retired to collect… meaning no work at all. Today they put limits allowing you to earn some income. in early retirement for every two dollars you go over the limit they take a dollar from a ssa check. What people don’t understand is that if they end up holding checks, ssa will give you a benefit increase after full retirement age for every check you did not receive as if you decided to collect those many months later in life to collect.

    • True that. A “settlement,” depending on its source, may not be regarded as earned income. Or, if it was earned before you retired, it may not be counted against SS earnings begun after you quit the job — this was the case with my RASL pay (back pay for unused sick leave). But I had to get the SSA to sign on to that — they do have a provision to account for that situation, but they don’t advertise it.

      If they decide you’ve out-earned the poverty-level income allowed, they will withhold payment of one or more SS checks. This is a problem if, like me, you were forced into early retirement during a severe recession when your savings were trashed and you needed to delay any drawdowns until the market recovered, because it will cause you either to further trash devastated savings or to go hungry. However, it does result in a small increase in benefits later (should you live that long).

      Apparently if you continue to work after full retirement age (which you will have to do if SS is your main source of retirement income), they continue to add slight benefit increases. This has happened for me each year, despite the minuscule amount I earn.

      The rules are mind-numbingly complex and the consequences of unwittingly violating them can be severe. This is why it is necessary to discuss your particular circumstances with a knowledgeable tax accountant.

  22. Agreed! But I disagree with the not advertised part. Ssa can actually be very complex so to feed out information can be difficult. With special wages (extra sick or vacation pay) almost always the representation of your earnings are incorrect on your w2’s. What I’m saying is a lot of times the employer hr department will not fill out the work properly and when it reflects, the w2 will fail to show a break down of your yearly earnings. So in other words it looks like you worked the whole year and those were your earnings for the year.
    As far as the corp.. you are right if your okay with a suspension of benefits and small investigation. I don’t blame ssa for it.. You can easily use it to control wages. Once everything clears they will pay out what is due.

    • You certainly do have to be careful in using this device. In my case, the S-corp didn’t earn enough to matter — certainly not enough to support me or to arouse suspicions when the tax lawyer decided we could leave the first year’s draw in there to by way of continued capitalization of the miniature company. Because my teaching income was about $400 below the earned income limit, we decided to leave the S-corp’s first-year income in the corporation. But if it had earned more than a few dollars that year, from what I understood her to say, we would have had to draw a “salary” from it.

      Entirely true about the HR folks. At GDU, by the time I and my crew were laid off, the university had already canned everyone in HR with enough seniority to be earning a decent salary. This meant remaining staff were low on experience. They seemed to have no idea what they were doing — no two people would tell you the same thing, and when you finally extracted what looked like a straight answer and took it to SS or to the state HR people, you’d be told the answer was wrong. At one large meeting of laid-off “retirees,” I learned from others that I was far from the only one who had that experience. Almost everyone there had similar war stories.

      The whole mess is so staggeringly complicated that it really takes an expert to navigate it, whether that person is in HR or is an independent accountant.

  23. Thank you for all of your advise. In real estate you have no control of annual income, maybe $10,000 one year and a much greater amount the next.
    I will seek the advise of a tax accountant in this matter and hopefully a successful solution to this problem.

  24. I have had an S Corp for 3 years. However I always paid myself via 1099 rather than W-2 wages and then file with Schedule C for FICA. This year I worked as an employee (W-2) of an unrelated Corporation strickly as their employee. Withholding all standard. Mid-year I was layed off.
    I reach full retirement age this year and as such I can earn up to 3,240 a month before my benefit is reduced.
    My S-Corp now has a new Corp-to-Corp contract and I will be drawing 3,000 a month (1099) with the rest as div distribution at end of year.

    Does the fact that I take income as 1099 rather than w-2 matter in the either the dollar amount or hours work test (Highly skilled)?
    In the past, I took 5,000/month in 1099 income.

    • @ Jim: I have no idea. This is a question for a tax accountant. A good independent accountant doesn’t charge all that much, and the advice you’ll get is well worth the money. Ask friends and other small-business owners for references. When dealing with the IRS, it’s important to consult with a professional.

    • It doesnt matter how many hours you worked.  For someone within the
      year of full retirement they look at the income from the begining of
      the yeat (jan 1, 2012) to the last day of the month prior to the month
      of your birthday.  So if your birthday lets say is 07/25/12 they will
      be looking at earnings from the 1st of the year to 06/30/12.  From
      July on you can make as much as you would like.  The limit for someone
      within the year of full retirement in the year 2012 is 38,880 for that
      6 month period only, and for every 3$ over the limit they take a
      dollar from a SSA check.  You can make that 38,880 all in one month if
      you wanted to and make $0 for the rest of the year it wont matter.

    • To the Guy;

      Your answer is not completely accurate. I have checked with SSA. Please note special rule that applies to my situation:

      Some people who retire in mid-year have already earned more than their yearly earnings limit. That is why we have a special rule that applies to earnings for one year, usually the first year of retirement.

      The special rule lets us pay a full Social Security check for any whole month we consider you retired, regardless of your yearly earnings. If you will

      be under full retirement age for all of 2012, you are considered retired in any month that your earnings are $1,220 or less and you did not perform substantial services in self employment.

      reach full retirement age in 2012, you are considered retired in any month that your earnings are $3,240 or less and you did not perform substantial services in self employment.

      “Substantial services in self-employment” means that you devote more than 45 hours a month to the business or between 15 and 45 hours to a business in a highly skilled occupation.

    • @Jim an S-Corp is a pass thru, it pays no taxes so I ask why on God’s green earth would you pay yourself on a 1099?

      Pay yours self a salary of $xxx a week and a distribution of profits = to $xxx.
      You pay income tax on both but only fica and medicare on the salary that is reported on the W-2

  25. @JIM

    You are %100 correct, but this is inmaterial in this case.  What you
    are refering to on a monthly basis is what SSA calls a LMETY (Last
    Monthly Earnings Test Year), which you are able to use once.  This is
    done when it is in your favor to go monthly rather then yearly.
    This does not matter because making $3000 a month and having the rest
    of your income come in after your full retirement age will leave you
    under the monthly or yearly limit.  If thats the case hours or skill
    level will not matter since limits were not exceeded.
    Im sorry i wasnt more clear but trying to keep it simple.

  26. If I am going to use an s corp for any income from substitute teaching should I put the s corp EIN number on a W-4 instead of my social security number?

    • @ DM McDonald: For that to work, the school or district that hires you as a substitute would have to pay your corporation (not you!) as a contractor. In other words, checks would have to be made to, say, Sam’s Substitute Teaching Service, Inc., not to Sam Snead. You’ll need to find out whether that is possible; many school districts regard substitute teachers as a kind of employee, withholding FICA & state and federal taxes, and will not pay a company for these services.

      For the income I have through my business, I do put the EIN on the tax paperwork. But the community college district will not pay my corporation, even though pay statements state clearly that pay is for contracting work.

  27. O.K. Here is a question……..We have an S Corp. registered to my wife. She is not yet retirement age, but I am. She draws a salary with a W-2. I take nothing. We do have distributions each year though. I have not applied for SS benefits, because I have been concerned that they will determine that I benefit from the distributions as the V.P. and/or I should be paying into SS/Medicare, etc.
    Anyone have any idea how this will work? I am 64 and foregoing a lot of income from SS by not applying.

    • @ David J: You need to talk to a tax adviser, who’s a lot more likely to give you correct information than you’ll get from comments on a blog post. If the corporation belongs to your wife (not to the two of you jointly), the IRS might regard you as an employee or contractor. In that case, whatever dividend is coming out of the S-corp presumably would represent her income, not yours. But the laws in this country are so complex, only an expert can advise you. Talk to a tax accountant; the cost is not that high and what you will learn is well worth your time and expense.

    • Thanks so much for the reply! I will be discussing this with our accountant. The real questions is who the business belongs to? How do you nail that down? She is the president and owner. When I setup the S-Corp (did it myself), Ohio required me to name at least one officer besides the President. So I made myself the V.P. It is her business, but we file joint tax returns. So how does that work?
      Lost in Ohio…………….THANKS!

    • @ David: I can’t answer that question. Clearly talking to a tax accountant or corporate lawyer who specializes in small business in your state is crucial.

    • @David J.

      You are in a similar situation that I was in when I took early retirement.

      ‘ She draws a salary with a W-2. I take nothing.’ <– that is a red flag for the IRS unless your name and SSN are not mentioned on the S-Corps 1120.

      The Mrs. and I both work for an ISP and we both are partners in an S-Corp.

      The SSA people were very interested about our S-Corp and thought we were shifting my income over to the Mrs. so I would suggest that if you do no work for that S-Corp get your name off of it.
      You say you are 64 so you are a year younger than me so you fall under these rules:

      If you make more than$14,640 they will deduct $1 for every $2 you make over that limit.

      You didn't mention your income level so you will have to do the math on that.

      I'd like to mention again that the S-Corp is a great instrument for a small business. I was a Nevada Resident Agent for years.

    • George,
      Thanks for the info! It is great help to have someone in the same situation provide feedback. I don’t know if I can remove my name from the S-Corp, but I will look into that. Her business has gone downhill in recent years. She is now only drawing $12K as a salary and the distribution is about $10K. I may just take a $5K salary, which would leave a distribution of only $5K. Social Security doesn’t count my retirement pension and I earn less than $10K at my part-time job. So I’d quality for my social security under the income limit. However, I worry that if I start taking a salary from my wife’s business now and apply for social security next month, it will still raise flags. Ya think?

  28. Lets talk about and S-Corp and early retirement.

    What is an S-Corp, well it’s a financial instrument that a small business can use.
    You need to file this in your state and I recommend a Resident Agent submit your paperwork.

    What does an S-Corp do for you? It’s a pass thru entity. The S-Corp pays no taxes but allows you benefits.

    Suppose your S-Corp makes $1000 a week, pay your expenses and you only have $600 in the bank. Pay yourself $300 on a W2 and $300 as a dividend (DOP).
    Both have to pay income taxes but only the W-2 income has to pay FICA and Medicare. Now that saved you some money didn’t it.
    50/50 on the w2 and dop and the IRS is fine with that. If you stop paying yourself the IRS will flag that and you could get audited .

    Second is the SSA does not count a dividend as the $1 hit against you. Don’t include that $amount when you file for SSA and that’s 1 point for congress for passing that law.

    Next, you never make too little money to have an S-Corp.
    It can pay for:

    Office space
    %of power bills and a plethora of other things.
    All these expenses are paid by the S-Corp and never have to be added to your income as it would in a sole proprietorship.

    There is a great book out there, ‘Inc. and Grow Rich’.
    Check it out at you library.

    If you make less than $14,640 a year you might want to take that SS early, or you may want to think about it.

    • My husband and I have had a S-Corp business since 1998. It grosses 500K a year. We each have $60K w-2’s and the balance after expenses comes over on the K. It is run out of our house. I keep the books and process paperwork. The money is commissions earned by my husband and others making sales. At 62 (husband who is 4 years younger) says I should semi retire and drop my W-2 earning to just under the earnings limit and continue to collect half the K plus early retirement SS. I have no desire to be hassled by SS or the IRS. I could meet the hours rule, because I barely work now.

    • @ Susan: Discuss this with your accountant. My understanding is that not all of what you withdraw from the S-corp has to come as wages. Some may be dividends (if you’re an owner); if you capitalized the corporation with your own money and carried that on the books as a loan to the corp, you may be able to have the S-corp disburse some funds to you as loan reimbursement. Dividends and loan reimbursements do not count as “earned income” for Social Security purposes. But remember: I am an English major! I am not an accountant! These are strategies to discuss with a professional.

  29. @David J, $5000 and $5000, probably not but talk to the people that do your taxes and they can let you know, my posts here are only to let you see the light.

    I worked in Las Vegas in a boiler room incorporation machine back in the 20xx’s.

  30. Hi. I just found your blog and it’s very interesting. People seem to be glossing over the number of hours of work for skilled people constriction in early retirement. How did you get around it? were you able to say that you worked fewer than 15 hours per month? I am a skilled doctorish type of person and I can’t say I worked few than 4 hours a week.

    Did SS ask you how many hours you work?

    I have not applied yet and wonder if it even makes sense because of the hours limitation.
    Thanks –

    • No, not that I recall.

      Remember, I was not collecting the pay I earned for contract editorial work — my S-corporation collected it. Clients paid the S-corp, and the money stayed in the corporation, except for payment of specific business expenses. For that reason, it didn’t have to be reported as MY earned income.

      This allowed me to keep my business going. Had I not sheltered my contract income by passing it into the S-corporation, I would have had to let my business die, since it was unlikely to earn enough on a regular basis to keep me going financially. Thus incorporating the business allowed me to keep it alive while I also taught adjunct at a community college, bringing in something vaguely resembling a steady income. Otherwise there would be no Copyeditor’s Desk today, and I would never have been able to escape the noxious teaching job, as I finally managed to do last week.

      The SS early-retirement earnings limitation is a little over $14,000. By coincidence, that was almost exactly what the college paid for a 3 & 3 teaching load. One year I went over the limit by just a few dollars because the college paid a small stipend when I developed an online course; the penalty for that was loss of an entire month’s SS benefit, right at Christmastime when I really needed the money. Eventually they returned the money — later the following year, which didn’t do me any good when I most needed it — and the amount of FICA I was paying through the college’s salary was credited toward my SS, over the long run raising my Social Security benefit.

      If you are a medical doctor and you’re practicing part-time, you probably earn a lot more than the 14 grand I was making — all told my net annual income was less than $25,000, and I managed to live on it. Possibly you should consider whether you should delay collecting SS until you reach full retirement age, scaling back your lifestyle for a few years until you’re eligible to get the benefit with no strings attached. I certainly would have done that if I could have — in my case, I had no choice, because no one would hire a 60-something Ph.D. in English.

      If that’s not a palatable option for you (and believe me, living like an anchorite is no fun, even for someone like me who has a limited social life), you should talk to a lawyer and a good accountant about incorporating your practice in such a way as to cover legitimately business-related expenses and to pay yourself the maximum allowable amount for early Social Security. I am not a lawyer or an accountant and so am in no position to advise someone else one way or another about this strategy; it’s an idea you need to discuss with a professional.

    • It is important to note that if you meet the age (62) and earning limit, the number of hours you work is irrelevent.
      I have discussed with my accountant the matter of drawing SS benefits and my concern about our income on my wife’s C-Corp. She takes an approx. 50/50 salary/distribution. Obviously, my concern was the distribution income showing-up on our joint 1040. He advise me that he will remove me from the role of VP and I need to sign my shares over to my wife. Since I take no salary from her business, I will qualify for SS benefits. He did say that SS will scrutinize my application, but they that will have no basis to deny me my full benefits. Additionally, he advised that they do not communicate with the IRS beyond the verification of my income.
      We’ll see what happens………………

  31. Thanks for your answer. I’m not a medical doctor and I have an s-corp too. After expenses I actually made around 14,000 this year so I definitely qualify on the income basis. BUT my question was about the hours worked. It’s hard to believe that you worked fewer than 15 hours a month, which is the maximum allowable for a self-employed person in a highly skilled profession. Maybe they don’t count adjuncts as “professionals” in the same way they count self-employed therapists (what I am, doctoral-level) and that’s why you were not asked the question.

    I guess I could apply and see what happens. I’m also considering getting spousal benefits instead, since I found out that my husband , who is 67, can apply for SS, I can collect as a spouse, and then he can immediately suspend his benefits since he wants to let them simmer and grow until he’s 70. This is called “file-and-suspend”.


  32. To :
    gail anderson July 29, 2011 at 9:58 am
    what if they deem that you are working too many hours
    and are not retired. How are you penalized if you filed
    a S corporation and took early retirement social security?

    Here’s what I imagine:

    You wouldn’t be “penalized”…you would be denied benefits in the first place.

    • That is exactly why you need to speak with a licensed professional when planning your retirement strategy. Personally, I would not just apply without having conferred with someone who understands the system, to the extent that anyone can understand it. The rules are so complex that even SS employees sometimes dispense incorrect information. Find a business lawyer and a first-rate accountant who can advise on these issues.

      I’ve heard of the strategy you describe — it’s been discussed on the PBS website. Think the feature, which is ongoing, is called “Ask Larry.”

      As for the S-corp: All I know is that I followed a corporate lawyer’s and a tax lawyer’s advice and the entity served its purpose in that it allowed me to keep my business going between the time I was forced to take early SS benefits and the time I reached so-called “full” retirement age.

    • BTW, does the 15 hours/month restriction make sense? If you’re allowed to earn $14,400/year and the federal minimum wage is $7.25/hour, that would break down to 1,986.21 allowable work hours a year. Divide that by 365 to get the number hours a day required to earn $14,400: 5.44. Now figure four weeks/month of with five work days, giving you about 20 work days a month: 20 x 5.44 = 29.59 hours a month.

      Thus the earned income allowance of $14,400 seems to contradict the allowable number of hours, since the typical senior citizen who has been laid off her job will find herself working at someplace like WalMart for minimum wage. You’d have to earn $80 an hour to come up with $14,400 a year at 15 hours a month.

  33. David J:

    It’s not about how much money you make. You can make as much as you like, but if you file early and make more than that maximum of $14,xxx, your benefits will be reduced. But you’re still *allowed* to collect before Full Retirement Age.

    However, number of hours worked is VERY relevant, because if you are self-employed, and if you work more than the allowable number of hours for a self-employed person who is filing early (without looking it up again, I think it’s 15-45 hours per month in general but no more than 15 if you work in an occupation required a “specific skill” *or* own a large business), you are not considered “retired” as per Social Security’s definition, and therefore you are not entitled to early benefits.

    Here is the bottom line as far as I can see: IF you are self-employed when filing for early retirement, and ***if, on your application, you are asked how many hours you work*** (and I would like to hear from anybody here who has actually filed for benefits before their Full Retirement Age) and IF you work more than the allowable hours to be considered “retired” (again, I believe it’s no more than 45 for most people but no more than 15 if you work at an occupation requiring a “specific skill” or own a large business),

    *are you going to lie?*

    Now you are saying, I believe, that you are being taken out of your corporation as an officer, and you are not going to be collecting any profits or salary anymore? But you are actually still working for the company? So, basically, you are still working but you’re saying you’re not. That’s great if (1) you want to lie to the government and (2) there is no paper trail otherwise of the financial fruits of your labor so no way to track you (this is why your accountant says number of hours worked doesn’t matter. Because he’s saying you don’t exist anymore as a worker, in effect, so how can number of hours matter anymore?)

    However, if you lie on your application, your accountant is not liable! only you are.
    funny: as for your comment about Walmart employees having to make $80 an hour not to work more than 15 hours a month. The 15 hours a month maximum is a test *only* for people (1) who are self-employed, and (2) do a job requiring a “specific skill.”

    The Walmart employee does not fall into either category.

    Again, the work hours limitation is only for SELF-employed people. There is a limit on the hours worked because, as the website says, self-employed people have “ways” of (I forget the exact wording but it basically means hiding their money!)

    (as this very blog entry is all about!) — so they do the “hours” test to give them a second way to disqualify a self-employed person who is hiding their money.

    (because, let us review : although, if you make more than that $14,xxx, your benefits will be reduced, you will still be *approved* for early benefits no matter how much money you make)

    One concept is binary, one is analog:

    First, the binary: Are you retired? Yes or No?
    Next, the analog: “Okay, now how much money do you make, so we can compute your actual benefit. ”

    One more thing. Let me see if I can articulate this; it’s a little fuzzy. It’s about the self-employed person who they allow to make $14,xxx without “docking” you, even though you can’t work more than 15 hours a month if you are a skilled professional. It seems weird and counterintuitive, but it’s not. Here is why:

    Say you’re a 62-year-old self-employed lawyer. You make $14,000 a year. You want to file for early retirement. Why, you ask, is a lawyer making such a little bit of money? How weird! NO, it is not weird under ONE circumstance: he is making such a little bit of money because he working a very few *number* of hours! and, in fact, that is what he is claiming: he is claiming that, despite his high *hourly*, he is hardly working anymore; he is essentially “retired.” And therefore he wants to claim his early retirement benefits.

    Does this make sense? Since self-employed professionals (people with a “special skill”) DO make a lot of money per hour, the only way they can pass the “Are you actually ‘retired’?” test that exists only for self-employed people claiming early benefits (because the test for people who have reached Full Retirement Age is *only* their age, remember; they need undergo no additional tests, such as hours worked or income) is to work a *very few number* of hours.

    So it is the exact *opposite* of your Walmart employee. I understand that you came up with that because, in your mind, people who are retiring at 62 are working for Walmart, etc., but, in fact, there are all sorts of other scenarios involved in early retirement, such as e.g. the self-employed lawyer who is cutting back on his hours now.

    This lawyer works the maximum allowable 14 hours a month and earns the maximum allowable $14,xxx a year AFTER EXPENSES (let’s not forget that part!) — maybe he actually bills $2800 a month — divided by 14 hours = $200 an hour — a typical hourly for a lawyer outside of a major city.

    He qualifies as “retired” and therefore eligible for full early benefits.

    (I think I need a new hobby – I’m getting too into this!)

    • Liz,
      I see what you mean about the relevance of the 15 hour limit. Yeah, I can certainly understand how that could be a sticky situation. I wasn’t thinking about it in terms of being self-employed and filing for “early” retirement. I figured that if you are operating a business, you really aren’t retired. I am retired.
      Oh… and “No, I would not lie!” I actually do help-out my wife with a few odds and ends (i.e. entering accts payable/receivable into Quickbooks, website maintenance, etc). However, I don’t draw any salary or do any significant amount of work for her. As you know, what is mine is hers and what is her’s is mine. Just kinda how it is when married and filing jointly. Removing my name as an officer is simply a formality that could preclude receiving SS benefits in the event that the SSA wants to nit pick and argue that I should be receiving compensation from the Corp. I have never drawn a salary from my wife’s business and have always worked in a separate full-time career position until I recently retired.
      Actually, my wife is faced with that same problem. I advised her to wait either until she is 66 or she sells the business. For her to file an application for early retirement just would not be worth the hassle.

  34. This 15 hour limit is a stranglehold for sole proprietors and S-Corps.

    The IRS will find every way they can to deny you an early retirement check. Unless I have a customer that files a 1099, and I have one that does, anything I report to the IRS as income is from our S-Corp and the IRS can’t track it unless they chose to audit us.

    If you chose to retire early and say you work for Wal-Mart or some other place you can work as many hours as you want as long as you don’t make more than $14,640 a year.

    Now if you have a business they think you are still working 9-5 and you are still getting pay that is reported on a W-2 they will think part of your income will be transferred to a spouse or other relatives.
    They will go over this with a fine tooth comb. SSA doesn’t want you to qualify if you are being paid by an S-Corp, and LLC or even worse a C-Corp.
    (Never form a C-Corp unless you want to go public and sell stock and then you open another can of worms)

    You very well may have to resign from your corporation and provide proof from the secretary of state of your state to the SSA.

    When we file our 1020 for our S-Corp we tell the IRS how much our gross income was and since the S-Corp is a pass through it pays no taxes, the employees do and that is reported on the W-2.

    Now once again the IRS has no way of knowing what your entity’s income is until you file unless you have a large account that files a 1099.

    Tell them the truth with the $ amount and always say you work less than 15 hours a month.

    To be honest, it should not be this way. A job is a job but our mental cases in congress care to differ.

  35. One more thing about S-Corps. This is a business and if you are doing business and someone pays you by check, cash or even gold gets deposited into your S-Corps business account.

    You can’t take your paycheck from a W-2 job and legally deposit that check into your S-Corp account.

    If you do you might be going to jail sometime in the future.

  36. Our state does not care who the officers in the corp are! They only list my Wife as the owner and President. I am (was) listed on the 1020 as the V.P., but that is the only place it is documented except when we originally formed it. That s why I needed to sign my shares over to her. Since she now holds all the shares, I am no longer affiliated with the corp.

  37. Disclaimer:
    I am not a lawyer nor am I am a CPA.

    I spent 6 months working in an Incorporation boiler room.

    I file the irs and state paperwork for our S-Corp and so far since 1998 no problems.

  38. WHY does social security limit a person’s income?? If a collector finds, that down the road, there is a chance to earn a little extra money…….why are they penalized for this……never understood this!!!!

    • No idea! It’s probably to discourage people from drawing benefits early. You’d think the fact that being forced to collect SS several years before you’d planned to retire causes you to lose a substantial amount of money would be enough deterrent, wouldn’t you?

      The whole business about being able to collect on a spouse’s benefit and then switching to your own when you come of age moots that theory, though.

  39. isn’t it true, though, that when you collect on a spouse’s benefit before your own Full Retirement Age you condemn yourself to collecting less when it’s time to collect on your own benefit as well? (this is what I’m gathering from my reading)

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