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Periodic Contributor

Quarters of Credit & Income Tax tip.

One thing people who own a “mom & pop shop” is how the income is attributed to each spouse. If your spouse “never worked” that just means income doesn’t show up as life-time earnings under the spouse’s life time earnings. If the spouse who has not “worked” has done things for the business and been paid from the business, you should separate that out and have that spouse claim income and pay taxes on it. Lots of times people file jointly and it doesn’t matter to them at the time as long as they pay the tax on the earnings.  But, later, when figuring out if one or both are entitled to retirement or disability benefits it will make a big difference.  

 

This is an “insurance” program.  Like car insurance. You are only entitled to benefits if you pay the premium.  The premium is paid by taxes. For every 3 months you earn around $2,000, you get one credit. You have to have 40 credits in your life time to be entitled to retirement.  Disability is a little harder to figure. That insurance premium is paid as long as you are paying payroll taxes. when you stop working, for whatever reason (like Work Comp) you stop paying the payroll tax the coverage will only continue for 5 years into the future — but, big But, you have to have 20 quarters in the 10 years prior to the date you became disabled.

 

If you only get one quarter per year, that’s fine. It counts.  But to be covered for disability, there have to be 20 in the past 10 years before you file.  That said, just because you are not covered today, it does not mean you weren’t covered yesterday.  Just like car insurance.  If you were covered, you are eligible for benefits then.  You have a credible claim any time in the covered period, provided, you reasonably believe you were unable to “work” — I’ll explain that in another post.

 

I am a lawyer.  I am NOT accepting new clients. If you reply to this, I will be happy to answer general questions about how disability works. This is not legal advice specific to you. This does not establish a lawyer/client relationship.  It isn’t advertising really either b/c I am not taking new clients.  I just want more specific information out there.  Social Security for Dummies has some information.  The information on the AARP about how this process works is accurate. But there are a few things that people don’t know unless they have practice in this area of law.

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@KayT286587 It is an excellent idea to consult with a CPA especially one  knowledgeable with SS Benefits. It will surprise you how some "Mom and Pop" businesses are organized (i.e., sole proprietor, limited liability corporation (LLC), S Corporation, Partnership, Qualified Joint Venture, etc.). Some forms of ownership are better at protecting the owner(s) personal assets. At any rate, the tax returns reveal how the business is organized and whether Schedule C is used or the more complicated Form 1065 (partnership). Generally, when both spouses own the business, it is a partnership unless they opt to be a Qualified Joint Venture (QJV). If a QJV, they will file the much simpler Schedule C. If, in the past, they filed only one Schedule C reflecting one owner, they will need to file a second Schedule C splitting out the income and costs of the business based on their applicable share. I used a 50%/50% ratio in my example. It can be any ratio the parties elect. Also, they may elect to keep the business as a sole proprietorship and hire the non-owner spouse as an employee or independent contractor. A CPA can work the numbers so it is financially advantageous. I understand the need for health insurance especially if disabled whether life threatening or not. I believe you need to be totally disabled for two (2) years to qualify for Medicare. So, working may have an impact on the SS disability determination. If both spouse's earnings are within 400% of the poverty level which is $69,680 for 2021, the ACA will provide a subsidy. ACA coverage may be better and cost less than just simply Medicare. As you know, a Supplement is needed if electing traditional Medicare. Depending on the amount of Average Indexed Monthly Earnings (AIME) that is accumulated for just 40 Quarters/Credits, the subsidies from the ACA may be greater than the amount of SS Benefits. For example, using $6,500/year for 10 years, I indexed those earnings to $100,000 (just a guess) rather than just $65,000. The AIME is $238.09 ($100,000 divided by 420 months (35 years). The SS Benefit will be $214.28 ($238.09 X .90 which is the percentage for the first bend point). This is where a CPA with SS knowledge will be beneficial. I suspect SS Spousal Benefits will be greater than the above SS Benefit. So, will it be a financial advantage for the parties to reduce one spouse's earnings to reallocate to the other spouse (and pay FICA taxes) to receive a benefit that will be payable otherwise with no FICA taxes? The ages of the parties, life expectancy, income, ACA subsidies, etc. must be reviewed. It is complicated.     

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Social Butterfly

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I think all @KayT286587  is doing is giving Mom and Pop businesses a heads up about the importance of understanding the ins and outs social security credits and eligibility when you’re self-employed.

 

Its good advice to seek the help of a professional early on, it could save you from making a costly mistake later.

 

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I am not sure that separating self employed income (SE) between  spouses will provide greater lifetime SS benefits. Factors such as the amount of SE, ages of spouses, amount of spousal benefits, amount of future survivor benefits, life expectancy, and amount(s) of FICA taxes paid need to be thoroughly analyzed before implementing the strategy. For example, a "Mom and  Pop" business reports SE in the amount of $200,000 which is allocated to one spouse. In 2022, FICA taxes (non-Medicare) are paid only on income up to $147,000 or $18,228 ($147,000 X .124 X 1). If you separate the SE equally, Mom and Pop will pay $24,800 ($100,000 X .124 X 2) or $6,522 more. I suspect you can adjust the SE so that there is a mathematical advantage, if any, over SS Spousal Benefits which can be as much as 50% and are essentially free (do not require paying FICA taxes). Disability Income is another issue that needs to be addressed from a financial perspective. Also, does the "Mom and Pop" business sponsor a retirement plan such as defined benefit, 401 K, etc. or do they save via IRA(s). Federal taxes are another concern that needs to be reviewed. I suspect the IRS will take a hard look at any amended returns which, I believe, are limited to three (3) years. 

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Periodic Contributor

I did send my clients to a CPA who looked at it accomplished the clients goal which was to add 8 quarters so she would be eligible for disability and retirement. I am not a tax person; or a financial planning person and do nothing with retirement. The type of income I’m talking about is, for example, a gift basket shop next door for one person to “work” in, probably making less than $6500 p/y and the other spouse has earnings from another source. 

 

Yes, you are right, there are too many factors to make any kind of determination about what is best. Many people come to me with insufficient quarters. This is one way to deal with that. It can be particularly important to disabled people under FRA b/c they may be eligible for Medicare early.

 

The only “advice” I meant by this is: think about it; talk to a tax guy and see if it makes sense for you.  It would have been handy if I’d made that specific statement.

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@KayT286587 It is an excellent idea to consult with a CPA especially one  knowledgeable with SS Benefits. It will surprise you how some "Mom and Pop" businesses are organized (i.e., sole proprietor, limited liability corporation (LLC), S Corporation, Partnership, Qualified Joint Venture, etc.). Some forms of ownership are better at protecting the owner(s) personal assets. At any rate, the tax returns reveal how the business is organized and whether Schedule C is used or the more complicated Form 1065 (partnership). Generally, when both spouses own the business, it is a partnership unless they opt to be a Qualified Joint Venture (QJV). If a QJV, they will file the much simpler Schedule C. If, in the past, they filed only one Schedule C reflecting one owner, they will need to file a second Schedule C splitting out the income and costs of the business based on their applicable share. I used a 50%/50% ratio in my example. It can be any ratio the parties elect. Also, they may elect to keep the business as a sole proprietorship and hire the non-owner spouse as an employee or independent contractor. A CPA can work the numbers so it is financially advantageous. I understand the need for health insurance especially if disabled whether life threatening or not. I believe you need to be totally disabled for two (2) years to qualify for Medicare. So, working may have an impact on the SS disability determination. If both spouse's earnings are within 400% of the poverty level which is $69,680 for 2021, the ACA will provide a subsidy. ACA coverage may be better and cost less than just simply Medicare. As you know, a Supplement is needed if electing traditional Medicare. Depending on the amount of Average Indexed Monthly Earnings (AIME) that is accumulated for just 40 Quarters/Credits, the subsidies from the ACA may be greater than the amount of SS Benefits. For example, using $6,500/year for 10 years, I indexed those earnings to $100,000 (just a guess) rather than just $65,000. The AIME is $238.09 ($100,000 divided by 420 months (35 years). The SS Benefit will be $214.28 ($238.09 X .90 which is the percentage for the first bend point). This is where a CPA with SS knowledge will be beneficial. I suspect SS Spousal Benefits will be greater than the above SS Benefit. So, will it be a financial advantage for the parties to reduce one spouse's earnings to reallocate to the other spouse (and pay FICA taxes) to receive a benefit that will be payable otherwise with no FICA taxes? The ages of the parties, life expectancy, income, ACA subsidies, etc. must be reviewed. It is complicated.     

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Periodic Contributor

You are a tax wiz. Thanks for the detail!

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Honored Social Butterfly

To add a bit more - The guidance from the SSA  - Program Operations Manual System (POMS)

SSA - POMS: RS 02201.022 - Reports of Wages or SEI Made for Wrong Period or Individual - 01/27/2009

 

There does have to be some proof to substantiate the claim.

If duties and responsibilities were equal, half of one spouse's SEI could be moved to the other.  However, the total amount between the two cannot exceed the initial SEI posted.  (even if actual SEI exceed the FICA limit).

 

Proof of material participation would be required.  In addition, if one of them had SEI for numerous years from the same trade, revision would be applied to all years and not just the one year of work credit needed.

This will require a copious amount of documentation on their part as well as additional supporting statements. Social Security will not give the benefit of the doubt here since the revision would result in a material change in determinations of entitlement and benefit amounts.

 

 

It's Always Something . . . . Roseanna Roseannadanna
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Periodic Contributor

When I have helped people correct their earnings record, all the proof they needed was the amended tax returns.

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Honored Social Butterfly

Today, I spoke to a person that I know that works for the SSA and they said that if this is just an error in reporting wages under the SSA system then there is no need to even involve the IRS - go directly to the SSA.  As long as there is substantiating data, they can use the Schedule SE in the year submitted to fix the distribution between the related parties.

 

So let's say that the parties (husband/wife) just forgot to complete their separate Schedule SE and it was just reported under one of their SS # - the records show that both worked there in the preceding and proceeding years - they can easily fix the division of SS covered earning between parties.

 

No need to involve the IRS and amended returns when there is no money or tax  issues involved - just under who's SS number it is reported.  SSA can fix that easily - and most likely going back pretty far too.

 

It's Always Something . . . . Roseanna Roseannadanna
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Oops, almost forgot.  You can go to a tax person and amend all the prior returns to add more credits for the other partner/spouse/friend who shows smaller self employment earnings because of the way taxes were filed.

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Honored Social Butterfly

I am not certain that just amending tax returns is gonna do what is necessary to do what you are describing.  The IRS amending process is for either money or figure error corrections - that would not be the case here, since the (SE) amount is correct and the division is what is necessary.  The IRS just sends the data off Schedule SE to the SSA for their logging in of amount along with the SS #, one or more of Sch. SE with the original return.

With the backlog of the IRS currently - it may take a very, very long time once they figure out what is being corrected or in this case, divided up differently. 

One would have to follow it along very carefully to make sure that the SE amount gets divided up accurately by the SSA.  

It's Always Something . . . . Roseanna Roseannadanna
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It’s worked for two clients of mine.  It’s worth a try when credits are short.

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@KayT286587 When you file an amended return because you want to report earned income not previously reported in a prior year not only will you pay FICA taxes, you’ll have to pay the federal tax on that income too plus interest and penalty charges.

 

If it’s taxable income to the IRS it’ll be taxable income to your state and local government. You’ll have to amend those returns as well and pay state/local taxes plus any interest and penalties.

 

All these amended returns times how many years you need to go back to get your 20 quarters may well be a nightmare trying to organize all this information. Depending how far back you have to amend is it going to be worth it?

 

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PS. I’ve seen other of your posts that have all been consistent with what I know. Have you ever considered becoming a non-attorney rep - unless you are a lawyer, in which case, this is a really cool practice area. So much help is needed. SSA helped develop a program called SOAR - which is designed to trained anyone who wants to help others file - shelters, churches etc.  https://soarworks.samhsa.gov/. The training program is pretty daunting, even for me.  I don’t agree with all of their strategies, but understand them and they make sense to me. The only cure for poverty is money. Poverty strikes the aging population disproportionally.  The more help there is, the better. Now that I understand this (126 dog years later) I do not thing having a “lawyer” just because the person is a “lawyer” makes sense.  Claimants would be better off if there were more knowledgeable people out there trying to help.  Yes, you can make. some money doing this. The bills need to be paid. But if helping is your primary motive, this is a great way to do it.

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Recognizing that I am not a tax guy, my understanding is the tax nets out because it has been paid once. No tax is owed, so no penalties, no interest.  Again, not a tax guy, but there is, I think, a limit on how far back a return can be amended. Guessing only: not more than 5. years. I suggest the best use of this technique is if the no-credit person has some credits, but not enough. Primarily, my post was for future reporting periods. If the habit is to just identify income as to one party of a small family business, it makes to start now to change the way income is reported so that in the future it will support DIB, FRA or ERA.

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So, the idea to amend the taxes is ONLY so each spouse can now report their own interests in the joint venture/business for the purpose of determining each one’s net earnings from self-employment and give each spouse credits for social security earnings.

 

That’s where your “the tax nets out because it has been paid once. No tax is owed, so no penalties, no interest” comes from.

 

All you’re after is to set their social security record straight and show Social Security each spouse’s respective interest in the net-earnings for as many previous years they’ll allow you to amend. That’s the definition of a legal loophole and thinking outside the box.

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@ReTiReD51 wrote

All you’re after is to set their social security record straight and show Social Security each spouse’s respective interest in the net-earnings for as many previous years they’ll allow you to amend. That’s the definition of a legal loophole and thinking outside the box.

 

There are a lot of IF's in this strategy - Sure, there is probably a way but it isn't just as simple as the OP thinks.  

SSA - POMS - SE Tax Returns Filed After Expiration of SSA Time Limitations 

It's Always Something . . . . Roseanna Roseannadanna
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@GailL1  I’ve amended quite a few federal and state tax returns typically for a missed deduction for a refund or failure to report income in a previous year for a tax due.

 

However, there’s lots of loopholes in the tax code. But I’ve never or even thought about amending to correct a Social Security record.  That’s above my pay grade.

 

I’m as uncertain and unaware as you that it can be done but I’m not saying it’s impossible. All we have to go by is @KayT286587 that she’s done it for a few of her clients.

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