26 Sep I’m self-employed. How can I qualify for Social Security?
Q. I am 32 years old and my wife is 31. I recently started an LLC for a catering business and my wife just left her job to take care of our newborn. I know Social Security payments are based on your lifetime earnings, but how are earnings determined when payments from clients go to the LLC? Do I have to take a salary from the LLC and pay my wife a salary so we can get Social Security?
— The boss
A. This is a very exciting time for you – a new business and a new baby!
There are many considerations to take when setting up a LLC.
You should sit down with a certified financial planner or certified public accountant to make sure you set up the business in the most advantageous way for your specific situation, said Peter O’Neill, a certified financial planner with RegentAtlantic in Morristown.
As your business continues to grow and collect revenue from clients, you’ll need to establish a disciplined bookkeeping system to keep track of earned income and qualified business expenses, O’Neill said.
“As a business owner, you have the ability to deduct qualified business expenses from your gross business income, which will in effect decrease the business’ taxable income,” he said. “Be sure to save all invoices and receipts to back up your books in the event of an audit.”
You can see what qualified business expenses are approved by the IRS here.
O’Neill said you should keep in mind that all net business income will be taxed in the year that it is earned, whether the cash is kept in a business account or pulled out into a personal account.
“Therefore there is no need for you to produce W-2s for when you pay yourself,” he said. “When filing income tax returns, each member of the LLC will need to report their portion of net business income on Schedule C and the corresponding self-employment tax due on Schedule SE.”
Generally speaking, he said, your net business income will be subject to self-employment tax in addition to ordinary income tax. The self-employment tax rate is currently 15.3 percent which is made up of two parts: 12.4 percent for Social Security tax and 2.9% for Medicare tax.
When calculating your personal adjusted gross income, you will be eligible to deduct half of the self-employment tax due, O’Neill said.
“In the eyes of the IRS, LLC members are not considered to be employees. Therefore, W-2s are only necessary for wages earned by non-members,” he said. “Because you and your wife are likely filing a joint tax return where all earned income will be captured, you do not need to produce a W-2 for her either.”
If you like, you can simply pay her a portion of the net income earned from any client that she may have helped with, O’Neill said. This is because spouses that file taxes jointly are essentially viewed as one taxpayer.
Lastly, assuming you need health insurance for you and your family, self-employed individuals are able to deduct the cost of health insurance. This deduction is taken into account when calculating net income from self-employment, O’Neill said.
Good luck with your business and your new baby!
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This story was originally published on Sept. 26, 2019.
NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.