Social Security

[Vic Ferrari]

Here is the deal.....

A 63 year old man works part time for an S-corp he and his wife own. He was paid a reasonable salary for driving the bus. The W2 was well less than 11,000 which is reasonable for the work he does. His young wife runs the business.

Social security has taken back all his social security payments saying his s corp k1 must be included as earned income such as a W2 or schedule C.

I told them to ask for this in writing and the Social Security workers refused and said that is the way it is. Too bad.

Are they correct?

[Armando Beaujolais]

It doesn't sound correct at face value. However, I'm curious as to what kind of income was generated by the S corp, what was the amount of dividends vs. wages paid, etc., etc.

If all the wages paid were reasonable, then no, SS shouldn't be counting S corporation earnings as earned income. But it sure looks like SS is saying the wages weren't reasonable for the work performed. Lots of questions. Taxpayer is 63. Did he earn a whole bunch more in wages from the S corp before he started collecting SS? Is it a service-intensive business? Was there a big change in reporting income within the past year?

It sounds like the clients talked to SS themselves and it's hard to say what really happened. But there needs to be some more info to get a feeling for whether there's a legitimate reasonable wage issue with SS.

[jainen]

All the wages

Armando is correct and let me emphasize where he says, "all the wages." That means the wife too. It is not just a question of how much does a typical bus driver earn per hour. You must look at the structure of profit and compensation for the whole business.

[Safire]

I don't believe that Social Security has the right to reclassify flow through income as earned income. It is not their job to determine "reasonable wages".

I think you have a valid argument on your hands.

[Armando Beaujolais]

I disagree, although I am not an expert on Social Security.

I believe that Social Security has the right to determine what consitutes earned income for purposes of benefit computations. The term "reasonable wages" might not mean exactly the same thing for purposes of income tax and purposes of Social Security benefits, in fact the term might be something different. However, it doesn't make sense that the Social Security Administration would be beholden to the IRS' determination for purposes of Social Security benefits.

I'd look at it as the same dynamics as a state employment tax audit. The state comes in, determines that a bunch of workers who have been paid on 1099's are actually employees, assesses payroll tax, unemployment, worker's comp, etc., for their purposes. The federal hasn't even been touched - yet.

Does anyone know for sure if Social Security follows compliance and enforcement of IRS? Or can they enforce on their own?

[jainen]

Report earnings

I'm not so sure about that. The retiree has to report earnings and it's his burden to prove the report is accurate if SSA questions it. Same as with tax returns.

To add to my previous post, looking at wife's earnings, total profits, and prior year compensation might help prove the case either way. Also if S-corp dividends are recharacterized as wages perhaps they were earned before retirement since client is only 63 now.

[Unregistered]

Uc

A lot of this board has Minnesota connections-the IRS pays for the State of Minnesota UC audit staff as long as they audit 4% of filiers and provide all reults to them. The only results they are interested in is reclassifing 1099s as employment related and they turn that over to social security. They have even changed the name of the audit staff.

By all means the social security has ruled on wages for social security for years. In any owner related business - Schedule C, C Corp or S Corp they do not want to see salaries dropped or changed to spouse or child to enable to qualify for SS or have slaries disappear and taxable income increase. They may miss somethings, but these people have seen more attempts at getting early SS then all of us combined.

Who is this Amando??? Is he a plant from tax book. Enjoy his responses.

[Vic Ferrari]

Social Security

I assure you there was no funny business with this situation. Everything is on the up and up and would pass muster. There were no wild income swings and the couple has modest financial means.

I really think we have some poorly qualified people speaking for Social Security that refuse to put it in writing. I find it odd the government worker would not put the statement in writing.

I was able to find no documentation stating S-corp k1 income could be included for the purposes of deciding if you get to keep your social security check or not. The lady at Social Security did tell her, "Well you could take out that profit so I'm counting it". My client replied he could take money out of his savings account and that does not make him give back his social security check.

If nobody knows I'm going to send them to the congress person to get this escalated to get an accurate answer.

[Bird Legs]

Accurate answer from congressman?

Good luck. Does your congressperson know the laws governing what constitutes income
to determine if you are entitled to Soc. Sec. or not?
Has congress come under Social Security yet? I think they have their own retirement
system outside social security.
tweet...

[jainen]

In writing

You can't seriously expect an SSA line worker to give you a ruling in writing, nor to do your research in regulations. The concept of reasonable compensation is not that precise anyway. The ordinary procedure is to appeal and request the workpapers or notes or whatever (I'm not sure if client has a right to that, but ask.) At the hearing client can present his supporting evidence along the lines we have mentioned. I don't see any mismanagement that would interest a congressman in any of this.

[Chief]

Social Security

I dont know if this is any help to you or not. When I retired in a September, the social security people claimed I owed them all of the SS income I received that year. They withheld all of the income the following year. It was like talking to a brickwall in explaining the situation to them. Finally after they with held all the income, they discovered I was correct after all and refunded it with interest. Just last week I was talking to a SS person on the phone trying to change my address and when I asked her to repeat the address she sarcastically said, "You're checking up on me, huh?" The employees there are a different breed of people. Good luck with your situation.

[S T]

Some info from SSA.Gov

Here is the deal.....

A 63 year old man works part time for an S-corp he and his wife own. He was paid a reasonable salary for driving the bus. The W2 was well less than 11,000 which is reasonable for the work he does. His young wife runs the business.

Social security has taken back all his social security payments saying his s corp k1 must be included as earned income such as a W2 or schedule C.

I told them to ask for this in writing and the Social Security workers refused and said that is the way it is. Too bad.

Are they correct?

Vic, I don't know if this will help, but here is some info from the SSA.gov website.

[Quote] What income counts toward the earnings test limit?

Answer
For purposes of determining whether Social Security benefits are payable, a person's earnings for a taxable year are the sum of pay for services as an employee plus all net earnings from self-employment (minus any net loss from self-employment) for that year.

Wages for Social Security purposes are gross wages - wages before any payroll deductions for income tax, Social Security tax, dues, insurance, or other deductions by the employer. We use gross wages as the basis for Social Security credit and for determining whether benefits must be withheld because of earnings.

Nonwork sources of income, such as:

inheritance payments,
pensions,
income from investments,
IRA distributions,
interest, or
other sources;
do not count as wages for the earnings test. The Social Security retirement program insures against loss of earnings from work and not against the failure to have investment income.

More information may be found in our publication called "How Work Affects Your Benefits," publication number 05-10069, which is available on the Internet at: http://www.socialsecurity.gov/pubs/10069.html


Earnings from interest, dividends, and other sources (generally referred to as unearned income) are not included. Regardless of your total earnings for a year, Social Security counts only earnings that are subject to FICA tax. ]

There is also an area on the website that you can email a question to and request a reply. That might be worth doing, since the taxpayer can not obtain a ruling from the local office that he is dealing with. Doesn't appear that the distributions not subject to SE on the K-1 should be entered into the earnings equation.

I have used the email and reply on the SSA site before with pretty good response.

Sandy