Tax Issues for Self-Employed Seniors

Self-Employment Taxes Regarding to Social Security and Medicare.

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More Baby Boomers are postponing retirement and going into business for themselves, or continuing in business. While seniors who are self-employed face some of the same tax and benefit issues as other small business owners, they also have to deal with some additional circumstances relating to Social Security and Medicare.

This article will review the circumstances and issues involved with self-employment for business owners over age 65 or who are receiving Social Security benefits.

The Small Business Administration (SBA) has an online course for what they call "Encore Entrepreneurs."

Who is Self-Employed?

For the purposes of this article, we will consider someone self-employed if the individual owns a business and is filing a business tax return using Schedule C, along with his or her personal tax return.

Self-employment Taxes and Seniors

Small business owners report business income from Schedule C by adding this income to their personal tax return income. Business owners must also report business earnings on Schedule SE, for earnings over $400 a year. Schedule SE calculates self-employment taxes (Social Security and Medicare tax on self-employment income. The Social Security tax rate for 2011 is 13.3 percent on self-employment income up to $106,800. If you have income from employment and also from self-employment, the employment income is counted first, if you go over the maximum income.

Although the self-employment tax rate is higher for business owners, there are several deductions that bring this cost down:

  • Your net earnings from self-employment are reduced by half of your total Social Security tax. This reduction is to bring self-employed individuals in line with the one-half of Social Security paid by employers for employees. This deduction is taken on Schedule SE.

Remember that you must pay both income taxes and self-employment taxes on the net income from your business, even if you are currently receiving Social Security benefits.

Social Security and Self-Employed Seniors

You may continue to work in your business and still collect Social Security benefits, but these benefits are limited if you exceed the maximum taxable earnings amount each year.

If your total income for the year, including employment and self-employment, is greater than the maximum allowed by Social Security, your Social Security benefits will be cut at the rate of $1 for every $2 of income over the maximum.

Beginning with the month you reach normal retirement age (age 66, if you were born between 1943 and 1954), you can earn as much as you want and not have to pay back any Social Security benefits you receive.

Your self-employment may also increase your Social Security benefit, depending on the amount of your income compared to other years of employment. The Social Security Administration (SSA) is notified by the IRS of your income and additional credits may be calculated.

Check with your local Social Security office for more questions about how your self-employment may affect your future Social Security benefits.

For more information on self-employment and Social Security, see the SSA bulletin: "If You are Self-Employed."

Determining your Net Earnings for Social Security

Your net earnings from self-employment, for Social Security purposes, are your grass earnings, minus allowable business deductions and depreciation. Some other income is not included for Social Security; for this list, see "If You are Self-Employed" (above).

Medicare and Self-Employment

In 2010, the IRS began to allow self-employed people to deduct Medicare Part B health insurance premiums from self-employment income. The deduction is taken on Line 29 of your Form 1040. Any self-employed person, regardless of age, can deduct the premiums they pay for health insurance, under certain conditions.

One is that the insurance must be established in the name of the business or - in most cases - the name of the person running the business.

Health insurance may be deductible for small business owners. Read more about how to find health insurance for self-employed seniors.