Are My Social Security Benefits Taxable?
A few days ago a client came into our office to have their taxes done. Despite being married, this person was adamant that they wanted to file under the “single” filing status. When we got to the bottom of it, the reason was due to their perception that their spouse’s social security benefits could impact his tax situation or she could lose them. Despite all of the information we provided this individual, we ended up not doing the return because they didn’t want to use the correct status.
Which brings us to our question; when are Social Security (regular, disability, or survivor) benefits subject to taxation? The answer is it depends. Particularly, it depends on the amount of your Adjusted Gross Income (AGI), the total amount of your Social Security benefits and where your income comes from.
- For someone filing using the status of Single, Head of Household, Widow or Married Filing Separately (and you lived apart), your benefits will generally not be taxable unless the total of your modified AGI, plus one-half of your Social Security benefits exceeds $25,000.
- If you are married and file a joint return, your modified AGI plus one-half of your Social Security benefits would generally need to exceed $32,000 before taxes kick in.
- If you are married filing a separate return, and you lived with your spouse, your threshold is actually zero, and your Social Security benefits generally may be taxable from dollar one.
The following examples will help illustrate some of the various scenarios that taxpayers may find themselves in. Additionally, they will walk through the calculation to determine how much tax they may have to pay.
Example One: Eric and Kathy are filing a joint return for 2012 and both received social security benefits during the year. Eric received net benefits of $7,500 and Kathy $3,500. Eric also received a taxable pension of $22,000 and interest income of $500. Since half of Eric and Kathy’s benefits ($5,500) plus their modified AGI of $22,500 doesn’t exceed $32,000, none of their benefits are taxable. Even though their benefits aren’t taxable, Eric and Kathy must file a return for 2012 because their taxable gross income ($22,500) exceeds the minimum filing requirement amount for their filing status.
Example Two: Jared and Aaronita are filing a joint return and have regular income of $15,000. They also have tax-exempt interest income of $12,000. Jared received Social Security benefits of $15,000 and Aaronita $5,000. Since half of their Social Security benefits ($10,000) plus their modified AGI ($27,000) exceeds the $32,000 threshold, they will have to pay taxes on their Social Security benefits.
Jared and Aaronita’s provisional income totals $37,000; their modified AGI of $27,000 plus one half of their Social Security benefits ($10,000). From this amount, they would subtract their threshold limit of $32,000. This gives them a result of $5,000. The law says that you must include the lesser of 50% of your benefits ($10,000) or 50% of the above result ($2,500) as additional income subject to tax. Based on the above, Jared and Aaronita would include $2,500 of their Social Security benefits as additional income subject to tax. If they are in the 15% marginal tax bracket, they’ll pay about $375 (15% of $2,500) in taxes on their total benefits of $20,000.
Example Three: Ricky and Bobby are married and live together, but file separate returns for 2012. Ricky earned $8,000 from his job and received $4,000 of Social Security benefits in 2012. Because Ricky is married filing separately and lived with his spouse during 2012, he must include 85% of his social security benefits in his taxable income. Thus, Ricky would enter $4,000 on his Form 1040, line 20a, and $3,400 on Form 1040, line 20b.
As you can see from the above, sometimes none of your benefits are taxable but that can increase to 50% all the way up to 85% in some circumstances. Thus, the one thing to keep in mind is that as your income increases, so will the portion of your Social Security benefits that is subject to taxation.
It is also important to note that these rules also apply to Social Security disability and survivor benefits. Many people assume that disability and/or survivor benefits are not subject to the rules regarding taxability of Social Security benefits. Unfortunately, this is not the case. Thus, if you are receiving Social Security disability or survivor benefits, you’ll need to make sure whether any of your benefits will be subject to tax.
This IRS website has a pretty cool tool to help you determine if your Social Security or Railroad Retirement Tier I Benefits Taxable. Additionally, IRS Publication 915 will give you much more detail regarding the taxation of your Social Security benefits and provides a number of worksheets you can use to do your own computations.
Dealing With A Bad Day As A CEO
Sometimes heading up a business can be rough stuff. Things will not always go as planned, customers may be demanding and vendors may be unreasonable or uncooperative. While you are the head of the company, you are a human being after it is all said and done. Given the preceding statement, us humans have emotions and sometimes that will lead you to have a bad day.
But just what do you do when you’re having a not-so-stellar day? Well, this is the hard part of running any and all businesses – dealing with the “inner game” that goes on in your head. What exactly is the “inner game” you may ask? Well, it consist of all the thought processes that regulate what we do with our time, how we respond to situations and the internal programming that guides how we think about our world and our place in it. When you are having a bad day, this is how the inner game might play out:
Something goes wrong and threatens either the success of a particular task or worse your entire business. You start to dwell on what is going wrong and as a result, you begin to miss opportunities to correct the situation. As things compound on one another, your spirits begin to slide and you lose hope. This feeling begins to permeate your attitude, which others will no doubt pick up on. From there you may find yourself feeling as if “nothing is going right” and things are simply going from bad to worse.
The major take away from the above scenario is that the Law of Attraction works on all of us, whether we are consciously utilizing it or not. The Law of Attraction basically says that you attract into your life that which you think about most. Thus, whatever you spend most of your time thinking about is most likely the thing you’re taking the most action on.
So then, how do you fix a bad day as a CEO?
Have a pity party for 2 mins and then move on! Yes, you are a human. But “crying over spilled milk” isn’t going to fix the situation. At some point, you simply need to tell yourself that this is the situation you are dealing with and you need to work on fixing it.
Reaffirm what you do well. Bad days will usually make you doubt yourself. What did I do wrong? Why didn’t we win that sale? How much longer can we survive? However, the key to reversing these feelings is to remind yourself that you are in fact good at something and this is just a setback.
Acknowledge what is out of your control. We as humans like to control things – it’s in our nature. But the reality is that a good portion of our lives are not within our control. To fix a bad day, let go of what you have no control over (like that truck that crashed into your storefront) and focus on what you can fix.
Focus on what you can do. In every situation there are things that you can do to “right the ship” and get you back on track. If that means going out and drumming up business, visiting clients, firing that headache employee or just taking a quick break to clear your mind, identify what you CAN control.
Act on what you can. Nothing is going to fix itself and no one is going to help you. Being a CEO is a lonely job. At the end of the day, you are responsible for everything that happens in your company (good and bad). But sitting around waiting for the situation to get better is not the answer. So get up, dust yourself off and get to work. Remember, whatever you spend most of your time thinking about is most likely the thing you’re taking the most action on. So start thinking/acting on how to make tomorrow a good day!
Filing Options For Married Taxpayers
So it’s the start of the next year and here you are gathering your papers together to file your taxes. Inevitably, sometime during the process you will encounter the question “what was your filing status?”
While this seems like a straightforward inquiry, it often poses a challenge for those who recently married, divorced or separated. Can I file as single if I didn’t change my name with the Social Security Administration (SSA)? Am I considered married if I’m separated but not divorced? What do I choose if my spouse passed away last year?
As with anything involving taxes, the answer often changes depending on the circumstances. In general, if you are married before December 31st of a given year, your two options are to go married filing joint (MFJ) and married filing separate (MFS). But we’re pretty sure you might have the following questions:
Wait, I can’t file as single? Nope, not under ANY circumstances. You are now married and have to file as such.
But what if I didn’t change my name with the SSA? Doesn’t matter. You will show your maiden name on your return, but your filing status will NOT be single.
Okay, so what if I married someone from another country and we haven’t been married in the US yet? This opens up another can of worms that we’ll write about in another post. But the short answer is the same as point number one, you have to file MFJ or MFS.
What happens if my spouse leaves me? This one can get tricky.
- Typically you would file MFJ
- If you and your spouse aren’t on speaking terms (or you don’t know where they are) you would file MFS unless…
- You have a child AND your spouse didn’t live with you for the last 6 months of the year – you may qualify to file Head of Household (HOH)
Okay, what if we got married and divorced in the same year? If on December 31st you were legally divorced OR legally separated, according to state law, under a decree of divorce or separate maintenance then you can file as single.
What happens if I was married, but my spouse passed away? If you spouse died during the tax year you are filing (e.g. 2012 in 2013) you can file MFJ for that year. For 2013 and 2014 you may be able to file Qualifying Widow(er) if certain conditions are met.
As you can see, picking the right status can be a challenge. If you need further help, check out IRS Publication 17 or their tool What Is My Filing Status? If you want to know if it’s better to file MFJ or MFS, check out this post we did last year.
Who do I issue a 1099-Misc to?
****UPDATE as of 01/01/21****
The information below was originally written when money paid to independent contractors was reported on Form 1099-MISC. As a result of the The Protecting Americans from Tax Hikes Act of 2015 (the PATH Act), independent contractor payments are now reported via Form 1099-NEC effective tax year 2020 (being filed in 2021). The deadline for filing remains January 31st.
While most of the information below for Form 1099-MISC applies to Form 1099-NEC and generally is still relevant, please refer to the YouTube video below for instructions on how to complete Form 1099-NEC.
******** Original Post Begins Below **********
If you employ an independent contractor in your trade or business, you are obligated to report their earnings to them and the IRS. This is typically done via the IRS form 1099-MISC. But just who is supposed to receive this form, when is it due and what are the penalties if it’s not filed on time?
Who Receives Form 1099-MISC
Form 1099 goes out to independent contractors if you pay them $600 or more to do work for your company during the tax year. Additionally, those whom you pay at least $10 in royalties or broker payments in lieu of dividends or tax-exempt interest should also receive a 1099.
Taxpayers should note that if you earned less than $600 and you don’t get a 1099, this doesn’t mean you don’t have to report the income. All income (it doesn’t matter if it’s $1) is taxable and should/must be reported.
In addition to individuals, you must also send a 1099 to the following if you paid them for doing work:
- Businesses that file on form 1040 Schedule C (i.e. sole proprietors/self employed)
- Single member LLCs, as they are considered disregarded entities (DREs) and also file on Sch C
- Partnerships or Multimember LLCs as they essentially file the same return as a partnership
However, there are some instances in which you don’t need to issue a 1099-MISC. These exceptions include:
- Suppliers of merchandise, telegrams, telephone, freight, storage, and similar items, with the exception of those who deal in fish or other aquatic life
- Corporations (e.g. those who’s names contain Corporation, Company, Incorporated, Limited, Corp., Co., Inc. or Ltd.) are also exempt from 1099 requirements, with the exception of those you pay for medical or health care, or law firms that you’ve hired for legal services
- Those corporations that have filed a S-Corp election with the IRS
- Tax-exempt organizations or to American or foreign governments
Need the specifics on who is exempt and who isn’t and don’t mind reading the Internal Revenue Code? Check out section Treasury Regulations, Subchapter A, Sec. 1.6049-4(c)(1)(ii) where it talks about a corporation, as defined in section 7701(a)(3).
When Is Form 1099 Due?
Generally you must furnish a copy of form 1099-MISC to the recipient by January 31st of the year following when the payments were made. If you are reporting payments in boxes 8 or 14, then you have until February 15th of the year following when the payments were made.
In addition to the recipient, you must also send a copy to the IRS (along with Form 1096) by January 31st IF you are reporting amounts in Box 7 for Nonemployee Compensation. If you are reporting amounts in any other box:
- You must submit it by February 28th of the year following when the payments were made if you are sending it via paper
- If you are submitting everything electronically, then you have until March 31st of the year following payment.
What are the penalties for filing late?
If you fail to file a correct information return by the due date and you cannot show reasonable cause, you may be subject to a penalty. The amount of the penalty is based on when you file the correct information return. Currently, the penalty is:
- $50 per information return if you correctly file within 30 days; maximum penalty $532,000 per year ($186,000 for small businesses)
- $100 per information return if you correctly file more than 30 days after the due date but by August 1; maximum penalty $1,596,500 per year ($532,000 for small businesses)
- $260 per information return if you file after August 1 or you do not file required information returns; maximum penalty $3,193,000 per year ($1,064,000 for small businesses)
Obtaining the information needed to file Form 1099
To ensure that you issue a correct 1099 to the recipient, complete Form W-9, Request for Taxpayer Identification and Certification. The W-9 includes the individual or businesses legal name, tax ID number, address and their signature attesting to the correctness of the content. You will then use this information to create the 1099 and send it to the IRS.
Do you have 1099s that you need to file? Shoot us an email at the address below or give us a call at 773-239-8850. Our filing services are extremely affordable (as low as $10/form) and not only will your documents be filed with the IRS, SSA and state, they can also be mailed to the recipient!
Chicago’s Protection Against Unfair Tax Preparers
In February 2012, there was a group of taxpayers in Chicago (and other states) that were pretty irate with one tax preparation company. Essentially, consumers were complaining of being told that the preparation of their tax return would cost $ and were told they had to pay $$$ when they went to get their return. There were a host of other charges made regarding this firm (e.g. inability to cash refund checks, checks for lesser amounts, etc) which ultimately led to the company being barred by the Illinois Attorney General from conducting business in Illinois.
Taxpayers in urban areas are sometimes targeted by unscrupulous tax preparation companies. These companies often use deceptive advertising practices, fail to fully disclose the cost of their services and often prey on the ignorance of those taxpayers who are less knowledgeable of their options. Well, the IRS and other governmental agencies got tired of getting complaints from Senators and Congress on behalf dissatisfied taxpayers. The result? The elimination of certain “predatory” products (e.g. Refund Anticipation Loans) as well as greater regulation/enforcement of preparers.
In an effort to protect Chicagoans, the Chicago City Council passed an ordinance in 2012 to help educate and protect them against unfair tax preparers. If you are a taxpayer using a paid preparer in 2013, know that most* tax preparers must do the the following:
- Offer a detailed explanation of their available services.
- Prior to rendering any service must provide the price of each offered service, any and all fees, and an estimate of the total charge based upon the services chosen for purchase.
- Inform customers of the reasonable period of time they can expect to wait for a refund.
- Tell customers they have the right NOT to utilize an alternative settlement product.
- Certify that they provided a clear explanation and the required disclosures.
- Inform customers of their right to file a complaint.
We recommend that you visit the City’s website and print the appropriate copy (English or Spanish) applicable to you. That way you can discuss it with your preparer if they give you any indications that they may not be on the “level” so to speak. Personally, we’d look for another preparer if one gives you any reason to believe that they may be unscrupulous. Matter of fact, we know just who to recommend!
Until next time.
* This ordinance applies to preparers physically located in the City of Chicago, with the exception of CPAs and Attorneys.
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