Still Working - Income Question About Max Amount

[WhoDonnit]

Jurisdiction

California

Hi, thanks in advance for any help. I have just filed for my Social Security. They tell me that the maximum amount of money that I can make from my job is $21,000.00 per year without a penalty on my Social Security benefit. On the phone they told me that is the maximum I can have in gross W2 wages. I am the owner of an S-Corporation that I work for. When the corporate taxes are completed each year there is a Schedule K form that shows company profits distributed to shareholders (me). Will that count as income that will effect my Social Security? How about other sources of income such as stock dividends or interest on savings? Thanks again!

 

[Zigner]

SSA - POMS: RS 02505.240 - Summary of How Major Types of Remuneration Are Treated - 11/20/2015

 

[adjusterjack]

I am the owner of an S-Corporation that I work for. When the corporate taxes are completed each year there is a Schedule K form that shows company profits distributed to shareholders (me). Will that count as income that will effect my Social Security? How about other sources of income such as stock dividends or interest on savings?

Sorry, income is income. Take a look at the IRS form 1040.

2022 Form 1040 (irs.gov)

Anything that goes into the first 14 lines is taxable income and will affect the taxability of your SS benefits.

Now look at the Form 1040 instructions.

1040 Instructions.pdf

Go to Page 32 and you'll find a Social Security benefits worksheet with which you can estimate how much of your Social Security benefits may be taxable.

By the way, an S corp is a disregarded entitly for tax purposes. The income is taxable just as if you didn't have an S corp.

What Is A Disregarded Entity? – Forbes Advisor

 

[WhoDonnit]

SSA - POMS: RS 02505.240 - Summary of How Major Types of Remuneration Are Treated - 11/20/2015

Thanks for the reply but know I am more confused than I ever was!

 

[Tax Counsel]

Hi, thanks in advance for any help. I have just filed for my Social Security. They tell me that the maximum amount of money that I can make from my job is $21,000.00 per year without a penalty on my Social Security benefit.

That only happens if you draw Social Security old age benefits (the retirement like benefit of Social Security) if you start taking benefits before your full retirement age. Once you reach full retirement age that offset will no longer happen. The income that triggers the offset for 2023 is income from working that exceeds $21,430 if you are under full retirement age for all of 2023. The year in which you reach full retirement age special rules apply for the transition year. After that, the offset during your full years of being at full retirement age will not occur. See the Social Security Benefits Planner page that explains this.

On the phone they told me that is the maximum I can have in gross W2 wages. I am the owner of an S-Corporation that I work for. When the corporate taxes are completed each year there is a Schedule K form that shows company profits distributed to shareholders (me). Will that count as income that will effect my Social Security?

The income that matters is your earned income, i.e. income earned from working. So, wages you get paid, self employment income, and active income from a partnership or S-corporation would all count as earned income and would add to the amount you can get before the offset occurs.

How about other sources of income such as stock dividends or interest on savings? Thanks again!

Unearned income, which includes interest, dividends, rents, royalties, capital gains, etc are not earned income and will not count against you for the limit on what can earn before the offset occurs. You could have millions of dollars in interest and investment income and it would not affect your benefits.

So to recap, it is your earnings from working that matter. Your S-corp income if you are an active participant in the S-corporation (and if it is a one person operation, you will be an active participant), your wages, and any self-employment income is what you need to be concerned about affecting your Social Security old age benefits.

 

[Tax Counsel]

Anything that goes into the first 14 lines is taxable income and will affect the taxability of your SS benefits.

The OP is not asking about when Social Security benefits end up being taxable income on his/her income tax return. The OP is concerned about the reduction (offset) of Social Security benefits that occurs when one has earned income while receiving Social Security before reaching full retirement age. That loss of SS benefits makes working to make extra income less attractive once the individual hits the cap that triggers the SS benefits reduction. That problem only lasts until the person reaches full retirement age.

By the way, an S corp is a disregarded entitly for tax purposes. The income is taxable just as if you didn't have an S corp.

That is NOT true. The Forbes article you linked is a bit confusing on the matter, but it does note that "Although an S-corporation and a sole proprietorship are essentially disregarded entities because the income passes through to the individual shareholder, they are not technically considered disregarded entities. Partnerships, corporations and LLCs with more than one member are also not disregarded entities."

The key word there is "essentially", which is the author's characterization of the effect of how a S-corporation works. The author notes that a S-corporation is not "technically" a disregarded entity. That shows the author has some grasp of the practical effect of how the income is treated but doesn't understand the language of tax very well. S-corporations are very much not disregarded entities. They are treated as separate entities and file their own returns. The same with partnerships. For S-corporations and partnerships, the proper term to describe how they work is that they are flow through entities; i.e. separetely regarded entities that file their own returns but in which the income is not taxed at the entity level but instead the income flows up to the owners and is taxed on the owner's returns instead.

A single member LLC is disregarded because while it is a distinct entity for state business organization law purposes, tax law disregards that and instead of the LLC filing a separate return for its the income of the LLC is instead directly attributed to the owner as though he/she was a sole proprietor. A LLC with more than one member is classified as a partnership for federal tax purposes even though under state business law a LLC is not treated as a partnership. Instead state law has separate rules for LLCs.

In short, the two authors of that Forbes article missed the mark in providing a correct technical explanation of how these various entities are actually classified by the IRS. That matters because it affects how the details of federal tax law (and state tax law where the state has adopted the same concepts) will apply. They had the general concepts right, but flubbed the details.

Under federal tax law there are primarily two disregarded entities: the single member LLC (including foreign entities that have the characteristics of a LLC) and a revocable living trust during the lifetime of the creator of the trust.

 

[adjusterjack]

The OP is not asking about when Social Security benefits end up being taxable income on his/her income tax return.

I misread OP's question. You're right about the offset. The SSA deducts $1 for every $2 earned above the limit (currently $21,240).

KA-01921 · FAQ | SSA

However, the OP will still have to deal with the taxability of SS benefits based on all income, as I explained above.