Allowable self employment expenses while collecting social security (to perform earnings test)

[SoCal-Guy-in-CA]

I searched for two days online and on the Social Security Administration (SSA) web site and could not locate an answer to this question.

I know that if you start collecting social security benefits before you reach full retirement age (FRA) and you have self employment income, there are offsets to your social security benefits if your net self-employment earnings in any month or year exceed a certain amount, or if you spend too much time at it (or if your self-employment income requires high skills) as part of something called the earnings test. 

I believe the SSA also excludes certain self employment expense deductions when looking at the earnings test. For example, they don't exclude expense deductions for payroll to a family member and they don't exclude contributions to an IRA, etc. While those are legitimate deductions that count toward lowering  your taxable income, they don't count in the SSA earnings text when deciding whether they will reduce your social security benefits. 

Deductions like rent, equipment, office supplies, advertising and the like are allowable expenses when the SSA calculates the earnings test.  What I'm trying to find out, which seems to be a state secret, is what expenses are allowed and not allowed with regard to the SSA earnings test? Are SE taxes an allowable deduction?  

[Critter-3]

Read this directly from the SSA  :   https://www.ssa.gov/pubs/EN-05-10069.pdf

What income counts…and when
do we count it?
If you work for someone else, only your
wages count toward Social Security’s
earnings limits. If you’re self-employed,
we count only your net earnings from
self-employment. For the earnings
limits, we don’t count income such as
other government benefits, investment
earnings, interest, pensions, annuities,
and capital gains. We do count an
employee’s contribution to a pension
or retirement plan, however, if the
contribution amount is included in the
employee’s gross wages.
If you work for wages, income counts
when it’s earned, not when it’s paid. If
you have income that you earned in one
year, but the payment was made in the
following year, it shouldn’t be counted
as earnings for the year you receive it.
Some examples are accumulated sick or
vacation pay and bonuses.
If you’re self-employed, income counts
when you receive it — not when you
earn it — unless it’s paid in a year after
you become entitled to Social Security
and earned before you became entitled.

[SoCal-Guy-in-CA]

Yes, I saw that pdf, but it does not answer the questions I posed

[Critter-3]

If you’re self-employed, we count only your net earnings from self-employment.

[SoCal-Guy-in-CA]

Yes, but when TurboTax calculates the earnings test for recipients of social security benefits, not all of the same expenses that can be used for the SE Tax, can be used for the earnings test. That's what I'm asking unless that's too complex for TurboTax and I need to use a live person at a tax prep service.

[Critter-3]

I have never heard of such a thing ... I believe  you are confused so talk to SSA directly and ask them to explain. 

TAX ON SOCIAL SECURITY

Up to 85% of your Social Security benefits can be taxable on your federal tax return.  There is no age limit for having to pay taxes on Social Security benefits if you have other sources of income along with the SS benefits.  When you have other income such as earnings from continuing to work, investment income, pensions, etc. up to 85% of your SS can be taxable. 

 What confuses people about this is that before you reach full retirement age, if you continue working while drawing SS, your benefits can be reduced if you earn over a certain limit.   After full retirement age, no matter how much you continue to earn, your benefits are not reduced by your earnings; your employer will still have to withhold for Social Security and Medicare. 

https://ttlc.intuit.com/questions/1899144-is-my-social-security-income-taxable

[SoCal-Guy-in-CA]

Respectfully speaking, you're answering every question I didn't ask, and not the one I asked. 

I'm not confused, I think you read my question too quickly 

[fanfare]

There are several tax prep services that will let you prepare your return at no cost to you.

At least one will even file your Federal return for you at no cost to you.

Try different tax software and enter your deductions and social security.

If you get the same results (tax due) then you can figure that  your particular situation is well understood by the tax software.

NOTE: when I did this for my unrelated situation, out of four software packages, I got four different results, all wrong, which was rather disconcerting.

Later, one updated their software - twice - and finally calculated correctly.

Hint: it wasn't TurboTax Online.

[Opus 17]

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@SoCal-Guy-in-CA wrote:

Yes, but when TurboTax calculates the earnings test for recipients of social security benefits, not all of the same expenses that can be used for the SE Tax, can be used for the earnings test. That's what I'm asking unless that's too complex for TurboTax and I need to use a live person at a tax prep service.

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There are two issues.

1.  Will social security reduce your benefit if you have earned income before full retirement age?

Yes.  For purposes of this calculation, the Social Security Administration says they use your "net income from self-employment."

https://www.ssa.gov/pubs/EN-05-10069.pdf

https://www.ssa.gov/benefits/retirement/planner/whileworking.html

Net income from Self-Employment would be line 3 of schedule SE, which includes farm income from schedule F, any income from K-1 statement from partnerships, and your schedule C net income.

https://www.irs.gov/pub/irs-pdf/f1040sse.pdf

Turbotax does not perform this calculation and this calculation has nothing to do with Turbotax.  The social security administration reviews your income tax information, and if your earned income exceeds the appropriate dollar value, they adjust your benefit payments for the following year.  

2. The other question is, will your social security benefits be taxable if you have other income?

The answer is yes, if your non-social security income plus half your social security income exceeds certain limits, your social security benefit will be partly taxable.

https://www.irs.gov/newsroom/dont-forget-social-security-benefits-may-be-taxable

This calculation is performed by Turbotax, to charge the correct income tax on your social security benefit.  It is important to understand that ALL taxable income affects this calculation (including pensions, gambling prizes, and investments), while only earned income affects the amount of benefit you are entitled to receive.  

Worksheets to determine how much of your social security benefit is taxable may be found here

https://www.irs.gov/pub/irs-pdf/p915.pdf

[SoCal-Guy-in-CA]

Respectfully speaking (because I know how things can come off online sometimes) , neither of the two questions you provided were questions I asked. I also noticed I could have phrased my question better.

I should have said...

Yes, but when TurboTax calculates my Schedule C net income, it doesn't tell me which expense deductions can affect  the earnings test for recipients of social security benefits.  It's easy to say that TurboTax doesn't perform this function, but TurboTax does perform tax analysis related functions that determine how expensed deductions are affected by, or can affect, something else. It may just be that TurboTax can't do what I'm asking.

Seems like there is a way to have TurboTax do this. If a tax filer is reporting SSA benefits and there is net schedule C income that could be affected, a page could pop up explaining that certain allowable expenses in determining taxable income may not be allowable for the SSA earnings text (i.e., retirement contributions, wages paid to a family member, etc.).  Just a suggestion.

[Opus 17]

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@SoCal-Guy-in-CA wrote:

Respectfully speaking (because I know how things can come off online sometimes) , neither of the two questions you provided were questions I asked. I also noticed I could have phrased my question better.

I should have said...

Yes, but when TurboTax calculates my Schedule C net income, it doesn't tell me which expense deductions can affect  the earnings test for recipients of social security benefits.  It's easy to say that TurboTax doesn't perform this function, but TurboTax does perform tax analysis related functions that determine how expensed deductions are affected by, or can affect, something else. It may just be that TurboTax can't do what I'm asking.

Seems like there is a way to have TurboTax do this. If a tax filer is reporting SSA benefits and there is net schedule C income that could be affected, a page could pop up explaining that certain allowable expenses in determining taxable income may not be allowable for the SSA earnings text (i.e., retirement contributions, wages paid to a family member, etc.).  Just a suggestion.

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The only thing I can find on the social security site is that your benefits may be reduced based on your "net income from self-employment."  If there is some secret formula for calculating "net income from self-employment" that is different than line 31 of schedule C or line 3 of schedule SE, I don't know where to go to find that.  

It would not be a Turbotax feature to warn you when your earnings exceed the limit and will cause your social security benefit to be reduced in the future--turbotax doesn't have any "tax planning" features and isn't designed to include anything not related to preparing a current year tax return.

If you want tax planning advice on how much you can earn before your benefits are reduced, and you think the social security administration uses some criteria other than "net income from self-employment", you may want to hire a professional tax planner. 

I also don't understand what you are asking for in terms of your schedule C.  You seem to want advice that certain items will affect your future social security benefit recalculation more than other items.  But the position of the IRS (and therefore of Turbotax) is that you must correctly report your legitimate expenses.  If you have an expense in a category that is harmful to your social security and you are preparing your tax return, you're stuck, it's too late to change it.  You have to report it correctly, even if it is harmful to other parts of your financial picture.  If you could legally tweak your expenses, it would have to be done before you incurred them, and that also gets into tax planning instead of tax reporting.  

[Critter-3]

Yes, but when TurboTax calculates my Schedule C net income, it doesn't tell me which expense deductions can affect  the earnings test for recipients of social security benefits.

Let's try this again ... SS goes off the NET Sch C profits ... I have never heard of certain expenses on the Sch C that are not allowed ... maybe you can post a link where you saw this information.   If you have a family member on payroll for your SE business then that is a valid business expense on the Sch C.  

Seems like there is a way to have TurboTax do this. If a tax filer is reporting SSA benefits and there is net schedule C income that could be affected, a page could pop up explaining that certain allowable expenses in determining taxable income may not be allowable for the SSA earnings text (i.e., retirement contributions, wages paid to a family member, etc.).     

The reduction of early SS benefits is not part of the income tax program and never will be ... this information needs to be gotten from the SSA  and is provided to early benefit recipients when applying for them. 

What Income Reduces Social Security Benefits?

If you plan to work in retirement and also collect Social Security benefits, then some of your benefits may be temporarily withheld based on your income. Until you reach full retirement age, your benefits will be reduced by $1 for every $2 you earn in excess of $18,240 for 2020 and $18,960 for 2021. In the year you reach full retirement age, your benefits will be reduced by $1 for every $3 that you earn above $48,600 for 2020 and $50,520 for 2021.

When we figure out how much to deduct from your benefits, we count only the wages you make from your job or your net profit if you're self-employed. We include bonuses, commissions, and vacation pay. We don't count pensions, annuities, investment income, interest, veterans, or other government or military retirement benefits.

If you are eligible for retirement benefits this year and are still working, you can use our earnings test calculator to see how your earnings could affect your benefit payments.

[Opus 17]

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@SoCal-Guy-in-CA wrote:

Respectfully speaking (because I know how things can come off online sometimes) , neither of the two questions you provided were questions I asked. I also noticed I could have phrased my question better.

I should have said...

Yes, but when TurboTax calculates my Schedule C net income, it doesn't tell me which expense deductions can affect  the earnings test for recipients of social security benefits.  It's easy to say that TurboTax doesn't perform this function, but TurboTax does perform tax analysis related functions that determine how expensed deductions are affected by, or can affect, something else. It may just be that TurboTax can't do what I'm asking.

Seems like there is a way to have TurboTax do this. If a tax filer is reporting SSA benefits and there is net schedule C income that could be affected, a page could pop up explaining that certain allowable expenses in determining taxable income may not be allowable for the SSA earnings text (i.e., retirement contributions, wages paid to a family member, etc.).  Just a suggestion.

---

See this for how the SSA determines "net income" for purpose of benefit reductions.  It does not mention wages paid to family members.  If there is another secret formula, I don't know what it is or where to look for it.

https://www.ssa.gov/benefits/retirement/planner/netearns.html

[SoCal-Guy-in-CA]

[QUOTED]

I also don't understand what you are asking for in terms of your schedule C.  You seem to want advice that certain items will affect your future social security benefit recalculation more than other items.  But the position of the IRS (and therefore of Turbotax) is that you must correctly report your legitimate expenses.  If you have an expense in a category that is harmful to your social security and you are preparing your tax return, you're stuck, it's too late to change it.  You have to report it correctly, even if it is harmful to other parts of your financial picture.  If you could legally tweak your expenses, it would have to be done before you incurred them, and that also gets into tax planning instead of tax reporting.[QUOTED]

TurboTax gives advice on tax matters as you proceed through the online process and you answer questions posed by TurboTax, so yes I was asking for advice in that vein.  Yes, I'm investigating how to expense items for the rest of the year to minimize both my tax liability and my exposure to the SSA earnings limit.  TurboTax frequently asks questions to ensure one's tax liability is minimized.  Reporting correctly is why I'm asking (for next year). This has nothing to do with already incurred expenses or tax returns for a previously filed tax year. 

This appears to be beyond the current abilities of the TurboTax service, but will come up much more frequently in the coming years as the "graying of America" accelerates.   

[SoCal-Guy-in-CA]

In the past I located a site that mentioned wages to family members was an expense excluded from the SSA earnings test (even though legitimate for calculating taxable income).

I have been trying to locate that site for the last two days because I never bookmarked it. I wouldn't call it a secret formula, but it's not advertised. I recall the article from from an CPA, but I cannot locate it again.