Improperly prepared tax returns can impact the Social Security you receive later in life.

Hello June,

Your site has a wealth of information, thank you.

I have a small Internet business on the side with my main job as an employee of an engineering firm. I get and file the w-2 from them and I pay that self employment tax as well. The IRS sends me a statement about what I can expect in monthly payments as a retired person and they list my taxable income amounts going back to when I was a lad.

But I have noticed that the taxable income amount they show only reflects what my employer has paid me and not the other income on the side. I file jointly with wife. I just fill out a Profit/Loss from business form and pay the total 15% for the Internet business. I feel like I'm not getting credit for this. Any thoughts?

Thanks, Joe
CLEVELAND, OH


Hello Joe,

You are welcome. Glad to provide wealth in the form of information.

You say "on the side income." By that I assume you mean your self-employed business.

I also assume that you are preparing your own tax return. I also assume the problem might lie in your tax returns.You say that you paid 15% SE Tax. But on self-employed income you must also pay income tax. Perhaps your returns were not prepared correctly.

Social Security calculations regarding how much you will get when you are old and living the sweet life of retirement are based on your income as an employee and your income from self-employment.

After April 15 take your returns to a tax pro or to H&R Block and ask if the self-employment income was handled properly. This can be done without a costly complete review of your tax returns. If the answer is yes, then take your returns to the Social Security office and get an explanation.

If your returns were not done correctly then you need to hire a tax pro and file amended returns.

-- June

Husband/Wife Business Benefits Social Security

Dear June,

My husband is a sole proprietor with an average yearly income of $80k. I am age 58, retired, and drawing a pension from my former employer and from my 401(k). My husband will be 62 in September and would like to file for social security but his income is too high.

Would there be any advantage to his hiring me (I am very active in his business) as an employee and paying me a salary thereby decreasing his income so that he is eligible for his full social security benefit? If so, how would be go about implementing?

Renee


Dear Renee,

Yes, there is an advantage to your husband hiring you. Of course it must be legitimate and not just a clever tax scheme.

He may hire you, give you full medical benefits as well as insurance and a pensions. All costs would be deducted from his business income, possibly reducing his income enough to not affect his social security payments.

You would start by setting up a payroll. Instructions for that are beyond the scope of an email.

Best,
June

Indies Who Collect Social Security

Hi Ms. Walker,

My Dad and I run an internet website business selling music education products.

We, or I should say he has been in business since 2000 as he is the sole proprietor. I'm 29 and have basically been non-existent in the eyes of the IRS since 2003 after I came home from college to help Dad out with the business. He is now taking his Social Security so he cannot make over $14,000 of income. So he said it's time to incorporate the business, in my name for that reason and for protection reasons (a trust to protect me from crazy relatives who may try to take a piece of the business and all of the scenarios that can happen in that realm).

I recall reading some info about Social Security Administration getting suspicious if they think a family member is simply funneling income to another family member, but still working. Is this a myth?

What would you suggest in our situation?

Thank you,Mike


Hello Mike,

I can't advise about the crazy relatives. That's a legal question and I strongly urge you to contact an elder care or estate attorney and talk over your dad's situation.

If your dad is a sole proprietor and you work for him the most simple and least expensive solution is for you to become his employee.

You didn't give me any numbers so I'll pull some out of the air to give you an idea of how it works.

Dad's indie business grosses $100,000 and his expenses are $20,000 which leaves a profit of $80,000. Dad wants to work less and play more golf or go hiking in India and so you do about 85% of the work. He pays you a salary of $68,000 a year which, when subtracted the business profit of $80,000, gives him a net income of $12,000. That's below the Social Security limit.

Things you must keep in mind:
-- You really must do 85% of the work.
-- You set up the payroll according to the rules.
-- You claim all your income.

Other advantages:
Dad could set up a pension plan for you as well as give you medical benefits.

Something else for you and all indies to keep in mind:
Many self-employeds cheat themselves because they don't know all the possibilities in structuring an indie business. They think that keeping business under-the-table or "non-existent in the eyes of the IRS" is the smart tax-saving way to do things. It's not smart. Often it costs you more than were you doing business on the up-and-up. And it could be considered fraud. Which is really not good.

Best,
June