Social Security Issues, if You’re Self-Employed

Did you know that when you’re self-employed, you’re thought of by the IRS as both the employee and the employer? Therefore, it’s your job to withhold Social Security from your earnings—contributing the employer’s matching portion of Social Security and the individual’s portion. Instead of withholding Social Security taxes from each paycheck and, because many self-employed people don’t get regular paychecks, you pay all the Social Security taxes on your earnings, when you file your annual federal income tax return. This is both your personal contribution and your business’ contribution.

Investopedia’s recent article entitled “How Social Security Works for the Self-Employed” explains how to calculate the Social Security taxes you owe, if you’re self-employed.

IRS Schedule SE is where you report your business’ net profit or loss as calculated on Schedule C. The federal government uses this information to calculate the Social Security benefits you’ll be entitled to in the future. Self-employment tax consists of both the employee and employer portion of Social Security (6.2% + 6.2% = 12.4%), as well as the employee and employer portion of Medicare (1.45% + 1.45% = 2.9%). Therefore, the total the self-employment tax rate is 15.3%.

If you are self-employed, what you pay in Social Security taxes is derived from your net income. On Schedule SE, you multiply your business’ net profit or loss as calculated on Schedule C by 92.35%, then you see how much self-employment tax you owe.

Note that the CARES (Coronavirus Aid, Relief, and Economic Security) Act lets employers defer employee Social Security taxes through Dec. 31, 2020—50% of the deferred amount will be due Dec. 31, 2021, and the other half by Dec. 31, 2022. Good news: this break also applies to the self-employed.

There are many business expenses that the self-employed can use to decrease their tax liability, in addition to the Social Security tax deductions you can take when you’re self-employed. Business expenses reduce your overall tax, which ultimately lowers your Social Security taxes. These tax deductions are a way of minimizing self-employment tax and Social Security taxes. However, you should know that this can be a negative as far as your Social Security benefit calculations. That’s because these are based in part on your taxable earnings. The more deductions you have, the lower your Schedule C income. Lowering your Schedule C income is a good way to reduce how much federal, state, and local income tax you owe, but that lower amount will be part of your Social Security earnings history. As a result, you may receive lower benefits in retirement, than if you didn’t take those deductions.

There’s no Social Security taxes on your wages that exceed a certain earnings threshold. The wage base for 2020 is $137,700 (up from $132,900 in 2019), and you don’t owe Social Security taxes on your earnings that are greater than that amount.

Social Security really isn’t much different whether you’re self-employed or work for someone else. Self-employed individuals earn Social Security work credits the same way employees do and qualify for benefits based on their work credits and earnings. It’s the business tax deductions that are the biggest difference. If you work for someone else, you pay Social Security taxes on all of your earnings, up to the $137,700 limit in 2020. However, if you work for yourself, deductions you claim on Schedule C can make your taxable income substantially lower. That may decrease your Social Security taxes today, but also may decrease your Social Security benefits later.

Reference: Investopedia (April 29, 2020) “How Social Security Works for the Self-Employed”

Medicare Patients Be Wary of COVID-19 Scams!

It’s still not easy to get tested for COVID-19 in many states, so it’s not surprising to learn that scammers are exploiting the shortage. They’re especially preying on the elderly.

Money Talks News’ recent article entitled “Are You on Medicare? Beware Coronavirus Scammers” reports that scammers use stolen personal data to commit Medicare fraud and identity theft, according to the U.S. Department of Health and Human Services.

Medicare warned beneficiaries in a recent email, “Unfortunately, scammers are using the COVID-19 pandemic to try to steal your Medicare number, personal information and money. And they’re using robocalls, social media posts and emails to do it.”

Some of these criminals are even knocking on people’s doors to talk them out of their personal data.

Seniors are advised to not divulge their personal information, including their Medicare number, with anyone, except a trusted health care provider or other qualified expert. If you’re unsure who’s legitimate, call for help and advice from your Senior Medicare Patrol, volunteer groups funded by the Department of Health and Human Services (HHS).

Health and Human Services says that your personal information can be used to fraudulently bill federal health care programs and commit medical identity theft.

You may also wind up being responsible for charges, if Medicare denies the claim for an unapproved test. You need to protect your Medicare and Social Security information, because it can be used in fraud schemes. If you think you’ve been contacted by a scammer, do the following:

  • Report suspected criminals to the National Center for Disaster Fraud Hotline at 866-720-5721 or write to disaster@leo.gov.
  • Be on guard, if someone requests your Medicare number, when you didn’t ask for services.
  • Be suspicious of those offering coronavirus supplies or testing.
  • When using social media, don’t click or respond to advertisements and offers for coronavirus testing.
  • If you think you should get a COVID-19 test, ask your doctor or doctor’s office.

In addition, the FBI advises everyone — not only seniors — to be aware of and to report:

  • Bogus emails purporting to be from the Centers for Disease Control and Prevention (CDC).
  • Phishing emails, which try to trick you into sharing personal information.
  • Counterfeit treatments and equipment, like sanitizing products, masks, face shields, goggles, respirators, protective gloves or gowns.

Reference: Money Talks News (May 19, 2020) “Are You on Medicare? Beware Coronavirus Scammers”

When will Social Security Stimulus Checks Arrive?

There have been a few hiccups in the distribution of stimulus checks, and some people may have to wait months before their check is delivered. Most of us are able to monitor the status of our check by using the IRS’s Get My Payment tool. However, for many Social Security beneficiaries, they’ll see a message that says “Payment Status Not Available.” That’s because most Social Security recipients don’t file tax returns.

Motley Fool’s ’s recent article entitled “Social Security Beneficiaries: Here’s When You’ll Get Your Stimulus Check” advises that if you are unable to track your payment, here’s when you can expect to receive your stimulus money if you’re collecting Social Security benefits.

Those first to see their stimulus checks will be the ones who have their direct deposit information on file with the IRS. The agency will deposit the stimulus check straight to their bank account.

However, if you receive your benefits in the mail via paper check, or if you’re not certain if your bank account information is on file, you can provide your information through the Get My Payment tool. This will help you get your check faster.

While using direct deposit will ensure you get your check the quickest, you can get your check in the mail instead if your bank account info isn’t on file. The IRS started sending stimulus checks the week of April 20, and it expects to mail out about five million checks per week. At that rate, it could take 20 weeks for all checks to be delivered.

Whether you receive your check in days or months will depend on your income. The IRS is sending checks in a particular order, and those with the lowest-income individuals will get their checks first. If your income is nearer to the $99,000 per year income limit (or $198,000 per year for married couples), you might not receive your check until late August or early September.

If your income is somewhere in the middle, it’s estimated that you’ll get your check sometime this summer.

If you’re receiving Supplemental Security Income (SSI), you’ll see your stimulus payment in early May, according to the IRS. Whether you receive that money via direct deposit or paper check will be based on whether the IRS has your bank account information on file.

The COVID-19 pandemic has caused a real financial hardship for millions of Americans, and waiting for your stimulus check can be stressful, especially if money is tight and you need the extra money. However, it’s a little easier when you can at least calculate when your cash is expected to be delivered.

Reference: Motley Fool (April 27, 2020) “Social Security Beneficiaries: Here’s When You’ll Get Your Stimulus Check”

Do I Really Need a Health Care Proxy?

The Pauls Valley Democrat’s recent article entitled “Advance directives and living wills” explains that an Advance Directive has three parts:

  • A living will
  • Naming of your health care agent; and
  • Your directions for anatomical gifts.

The individual that you name as your Health Care Proxy will make decisions for your treatment and care, if you’re unable to do so. These decisions may extend to all medical issues and aren’t limited to end-stage, life determining decisions that are mentioned in your living will. This is a form of power of attorney that authorizes your agent to act in your behalf to address issues like these:

  1. Accessing your medical information
  2. Discussing your treatment options with your healthcare providers
  3. Getting second opinions on your diagnosis
  4. Selecting and authorizing various medical tests
  5. Your placement in a hospital or care facility
  6. Transferring your care to a new physician; and
  7. Communicating your wishes on life support in terminal or unconscious situations.

For end of life decisions, your health care proxy is bound by your written wishes as expressed in your living will. Life support can be terminated, only if you so authorize in writing. Your healthcare proxy can’t make that decision for you, because that is “personal” to you. You may select one or more persons to act as your proxy, although if two are selected, you should predefine what to do in the event of a conflict.

A best practice is to choose a person who’s younger than you who is geographically close, a person with time to assist you and with whom you’re willing to share in advance your wishes, likes and dislikes as to medical care. This person should be trusted to act and honor your wishes.

Because many decisions relate to your very personal concerns about religion, death and dying, these feelings should be shared with your health care proxy before any serious situation.

The Advance Directive is a very important document that pertains to your wishes, as they relate to medical care, end-of-life and death.

Parts I and II can discuss your wishes for care treatment, as well as your choice of a person to represent your wishes. These are two very important issues. Take the time to consider the advance written expression of your own wishes.

Reference: Pauls Valley Democrat (Feb. 12, 2020) “Advance directives and living wills”

How Can I Fund A Special Needs Trust?

TapInto’s recent article entitled “Ways to Fund Special Needs Trusts” says that when sitting down to plan a special needs trust, one of the most urgent questions is, “When it comes to funding the trust, what are my options?”

There are four main ways to build up a third-party special needs trust. One way is to contribute personal assets, which in many cases come from immediate or extended family members. Another possible way to fund a special needs trust, is with permanent life insurance. In addition, the proceeds from a settlement or lawsuit can also make up the foundation of the trust assets. Finally, an inheritance can provide the financial bulwark to start and fund the special needs trust.

Families choosing the personal asset route may put a few thousand dollars of cash or other assets into the trust to start, with the intention that the initial investment will be augmented by later contributions from grandparents, siblings, or other relatives. Those subsequent contributions can be willed to the trust, or the trust may be named as a beneficiary of a retirement or investment account. It is vital that families use the services of an elder law or special trusts lawyer. Special needs trusts are very complicated, and if set up incorrectly, it can mean the loss of government program benefits.

If a special needs trust is started with life insurance, the trustor will name the trust as the beneficiary of the policy. When the trustor passes away, the policy’s death benefit is left, tax free, to the trust. When a lump-sum settlement or inheritance is invested within the trust, this can allow for the possibility of growth and compounding. With a worthy trustee in place, there is less chance of mismanagement, and the money may come out of the trust to support the beneficiary in a wise manner that doesn’t risk threatening government benefits.

In addition, a special needs trust can be funded with tangible, non-cash assets, such as real estate, securities, art or antiques. These assets (and others like them) can be left to the trustee of the special needs trust through a revocable living trust or will. Note that the objective of the trust is to provide the trust beneficiary with non-disqualifying cash and assets owned by the trust. As a result, these tangible assets will have to be sold or liquidated to meet that goal.

As mentioned above, you need to take care in the creation and administration of a special needs trust, which will entail the use of an experienced attorney who practices in this area and a trustee well-versed in the rules and regulations governing public assistance. Consequently, the resulting trust will be a product of close collaboration.

Reference: TapInto (February 2, 2020) “Ways to Fund Special Needs Trusts”

Facts and Figures for Older Workers and Retirees in 2020

A new year always brings change, and this year is no exception. From Market Watch, the article “Numbers that older workers and retirees need to know in 2020” provides key information for this new year.

Retirement Plan Changes. Limits for how much can be saved in 401(k), 403(b), Thrift Savings Plan, and most 457 plans have increased by $500 to $19,500 for 2020. If you are 50 and older, the “catch-up” contribution has also increased by $500, so you can now save an additional $6,500 in those accounts.

For those with SIMPLE retirement plans, which are usually from small businesses with 100 or fewer employees, you can increase savings by $500 to $13,500.

What hasn’t changed—if you have an individual traditional IRA, you can save $6,000, with a catch-up contribution of $1,000.

Social Security Changes. The Social Security Administration reports that the average monthly benefit in 2019 was $1,356.05. This will rise by 1.6% in 2020, which will mean an increase of $21.69 per month. Last year, some 63.8 million Americans took Social Security benefits. It was the first year since the program began in 1935 that spending topped $1 trillion.

Another change to Social Security in 2020 is the longer period of time to reach full retirement age. For people born in 1958, this now increases to 66 years and eight months. If you were born in 1958, you’ll need to be that age to collect your full retirement benefit. The longer period is also going to increase in 2021 and 2022—making the full retirement age 67 for anyone born in 1960 or later.

That doesn’t mean people can’t get Social Security benefits earlier—you can elect to take benefits as early as age 62—but you’ll receive less. If you take benefits at age 62, they’ll be 75% of the monthly benefits because you will have added 48 months. At age 65, you’ll receive 93.3% of full benefits because of adding an additional 12 months. If you are taking spousal benefits, there are more numbers to consider.

Medicare Changes. The good news was the increase from Social Security. The bad news? Standard monthly Part B premiums will increase 6.7%, from $135.50 in 2019 to $144.60. That’s the minimum premium. Depending upon your premium, they could go as high as $491.60 per month. Medicare officials blame higher drug prices on the increase.

Health care costs are part of a rising tide of costs facing retirees and older workers. Considering how few Americans have enough money saved for retirement, this is going to become more of a national issue as boomers and millennials age. It should serve as a reminder for all—save as much as you can for retirement, starting now.

Reference: Market Watch (Dec. 28, 2019) “Numbers that older workers and retirees need to know in 2020”

How Can Life Insurance Help My Estate Plan?

In the 1990s, it wasn’t unusual for people to buy second-to-die life insurance policies to help pay federal estate taxes. However, in 2019, with estate tax exclusions up to $11,400,000 (and rising with the cost-of-living adjustments), fewer people would owe much for estate taxes.

However, IRAs, 401(k)s, and other accounts are still 100% taxable to the individuals, spouses and their children. The stretch IRA options still exist, but they may go away, as Congress may limit stretch IRAs to a maximum of 10 years.

Forbes’ recent article, “3 Ways Life Insurance Can Help Your Estate Plan,” explains that as the IRA is giving income from the RMDs, it may also be added, after tax, to the life insurance policy. If this occurs, it’s even possible that the death benefits could grow in the future, giving a cost-of-living benefit to children. This is one way how life insurance can be used creatively to help your estate plan.

For married couples, one strategy is to consider how life insurance on one individual could be used to pay “conversion tax” at death, using tax-free benefits. When the retiree dies, the spouse beneficiary can then convert all the IRA (taxable money) to a Roth IRA, which is tax-exempt with new, lower income tax rates (37% in 2018-2025 versus 39.6% in 2017 or earlier).

This tax-free death benefit money can be used to pay the taxes on the conversion, letting the surviving beneficiary have a lifetime of tax-exempt income without RMD issues from the Roth IRA. The Social Security income could also be tax-exempt, because Roth withdrawals don’t count as “income” in the calculation to see how much of your Social Security is taxed. However, you’d have to be within the threshold for any other combined income.

Life insurance for both individuals (if married) may also be a good idea. If the spouse of the IRA owner dies, the money from the life insurance can be used once again. If this is done in the tax year of the death for married individuals, the tax conversion could be done under “married filing status” before the next year, when the individual must use single tax filing status.

Another benefit of the IRA-to-Roth conversion is the passing of Roth IRAs to heirs, which could create a lasting legacy, if planned well. New life insurance policies that add long-term care features with chronic care and critical care benefits can also provide an extra degree of benefits, if one of the insureds has health issues prior to death.

Be sure to watch the tax rates and possible changes. With today’s lower tax rates, this could be very beneficial. Remember that there are usually individual state taxes as well. However, considering all the tax-optimized benefits to spouses and beneficiaries, the long-term tax benefits outweigh the lifetime tax liabilities, especially when you also consider SSI tax benefits for the surviving spouse and no RMD issues.

Life insurance in retirement can help protect, build and transfer wealth in one of the easiest ways possible. If you’re not certain about where to start with your life insurance needs, speak with an experienced estate planning attorney.

Reference: Forbes (November 15, 2019) “3 Ways Life Insurance Can Help Your Estate Plan”

What Should I Keep in Mind, When I Remarry?

Before you remarry, discuss any past financial issues with your fiancé, and plan for success, by considering some important ideas.

U.S. News & World Report’s recent article, “6 Financial Considerations for Remarriage,” lists six financial considerations and crucial steps to take before you remarry:

  1. Revise Your Budget. Whether this is your first, second, or third marriage, couples need to create a budget for daily spending, monthly expenses and big-ticket purchases. You should also talk about your household expenses and costs related to children from a prior marriage. If you have to pay alimony, let your new spouse know. It’s also a good time to talk about credit card debt, past investments you’ve made and retirement accounts. You may want to draft a prenuptial agreement.
  2. Inform your Fiancé of Any Financial Obligations, Including Child Support. Before getting married, review the laws to see how child support may be impacted by marriage to a new person. While it’s unlikely that you would lose your child support if you remarry, the family court may reduce the amount. If a person paying the child support is remarrying, they should talk to their partner prior to the marriage to make certain they understand the amount of the payments.
  3. Check Insurance and Benefits. A frequent mistake when remarrying, is not updating the beneficiaries of life insurance policies. You also may have to look at other updates to your coverage, like who will be on your health plan, and you may need to modify your homeowner’s insurance with a spouse and children in residence. Understand that if you get government benefits, like Medicaid or Social Security, you could forfeit your Medicaid eligibility when you remarry if your spouse’s income is too high to be eligible. You might also discover that your Social Security benefits from an ex-spouse will stop, after you remarry.

A second marriage may also increase a parent’s income for federal financial aid purposes for college. If a parent is the custodial parent for the FAFSA (Free Application for Federal Student Aid), their income now may include their new spouse’s income. It is important to discuss saving for college and tuition costs, as well as if either partner has children from a prior marriage, whether each spouse will save money for tuition costs.

  1. Estate Planning Is Critical. Check your estate planning before remarrying. That includes a will, medical powers of attorney, do not resuscitate orders, durable powers of attorney, designations of guardianship or consent to adoption and various trusts, including trusts for special needs children. If you have children from a prior relationship, hire a qualified estate planning attorney.
  2. Create an Inheritance Plan. If you have children from a prior relationship, you need to put the right estate planning documents in place to protect them from being disinherited. In some states, a last will and testament may be enough, but in others it may make sense to also have a revocable living trust.

The biggest mistake that couples commit when entering their second marriage, is thinking that their own children will inherit any of their estate, if they die first. Perhaps the adult children will inherit some of the estate, but you should speak to an estate attorney to create a customized strategic plan. In many instances, the living spouse will change the plan and leave everything to their children and nothing to yours.

Reference: U.S. News & World Report (November 18, 2019) “6 Financial Considerations for Remarriage”

What are the Major Changes to Social Security in 2020?

Social Security supports millions of Americans, giving them vital benefits in retirement or if they are disabled. For many of those recipients, Social Security contributes most or all of their income.

Motley Fool’s recent article, “4 Must-Know Facts About Social Security for 2020,” says that to get as much as you can from Social Security, you need to understand how each year’s changes will impact you. With benefit checks, retirement age, maximum benefit calculations and Social Security payroll taxes, there’s quite a bit for people to monitor with Social Security in 2020. Let’s look at few big changes:

  1. Next year’s cost-of-living adjustment. Every year, Social Security gives those receiving benefits a cost-of-living increase in their monthly checks. The amount varies from year to year, based on inflation figures. The SSA recently announced that it would increase benefit checks by 1.6% at the start of 2020. This bump will impact seniors in different ways. The typical retired worker will see monthly benefits rise from $1,479 to $1,503. For couples receiving two benefit checks, the typical total will rise by $40 to $2,531 per month. If you’re receiving Social Security benefits based on a family member’s work history, you’ll also see increases. Widowed parents with two children will see $46 more per month ($2,934). Surviving spouses without eligible children will receive a $22 per month increase to $1,422, while the typical disabled worker will see checks go up $20 to $1,258 per month.
  2. Early retirees in 2020 will see a higher full retirement age. The SSA figures your benefits using a formula that anticipates that you’ll claim Social Security when you reach full retirement age. If you claim earlier, then you’ll receive less than if you had waited. However, for those turning 62 in 2020, full retirement age will be slightly higher than it was for those turning 62 in 2019. Those born in 1958 will have a full retirement age of 66 and eight months—two months older than it was for people who were born in 1957 and reached 62 in 2019. Thus, 2020’s 62-year-olds will take a 28.33% reduction in their monthly payment, compared to what they’d get at full retirement age. That’s a little more than the 27.5% reduction that applied to 2019’s 62-year-olds.
  3. High earners can anticipate a larger maximum Social Security benefit. If you retire in 2020 and qualify for the maximum benefit, you’ll see a bigger check than those who retired this year. If you work to full retirement age before collecting benefits, your maximum amount for Social Security benefits will be $3,011. That’s an increase of $150 from 2019.

However, not every increase will be that large, because receiving the maximum depends significantly on exactly when you elect to retire and take benefits. For those claiming Social Security at 62, the maximum monthly benefit will go up $56 to $2,265. Those retiring at 65 will see a $100 increase to $2,857 per month. However, for those retiring at age 70, the increase will be minimal, increasing only $20 to $3,790 per month. Even if you end up short of the absolute maximum, those earning higher incomes can generally expect to see a boost to what they’ll receive.

  1. High-income workers can plan on paying more in Social Security taxes. Payroll taxes are the main source of revenue for Social Security, and the maximum Social Security payroll tax is going up. In 2020, $4,800 more in earnings will be subject to payroll tax, maxing out at $137,700. Between the 6.2% employee portion and the matching 6.2% employers have to pay, a total of 12.4% of your earnings will be taken by federal government.

Those earning in excess of $137,700, will have their withholding increase by $297.60. Self-employed workers will see their maximum taxes rise by $595.20. However, most workers won’t see any change at all, because typical Americans earn far less than $137,700, and the same 6.2% rate will continue to apply on total earnings below that amount.

Reference: Motley Fool (October 27, 2019) “4 Must-Know Facts About Social Security for 2020”