I have retired early, but as a fairly recent immigrant (from the U.K. to the U.S.) I don’t yet have the 40 credits that I need to qualify for Medicare when I reach 65.
I have found a part-time consulting job that suits me well. However, I would not be an employee with a W-2, I would get earnings on a 1099, and this is not something I’m familiar with.
A bit of amateur research tells me that I file Schedule C, reporting these 1099 earnings from consultancy work as self-employment earnings, and that I will be required to pay “Self-Employment Tax” on these earnings. Could one of the tax pros on the board confirm that paying Self-Employment Tax on 1099 consultancy earnings generates Social Security & Medicare credits in just the same way as payroll tax for a W-2 employee?
If they are giving you a 1099, they are treating you as a self-employed independent contractor. You will earn Social Security credits as a self-employed contractor but you have to pay your own payroll taxes. You only need to make $5,280 in a year to earn 4 credits.
With the main question answered, I’ll go into other things you may not have thought about:
Keep in mind that not being paid on a W-2 means that they aren’t withholding payroll tax or income tax on your earnings, all of which you’ll have to pay when you file your tax return if you don’t make some estimated payments yourself. There are a certain set of conditions under which you won’t owe penalties, but if you don’t make any estimated payments, have nothing withheld throughout the year, and had an actual tax burden last year, you probably won’t escape them. They aren’t a ton, but they are something, plus there might be state taxes and their penalties. In Michigan, the state income tax penalties are heinous if you don’t make any estimated payments. If you’re not making all that much money it might not make much sense to hire a CPA (or other tax professional) to go over your situation and advise you how much to pay ahead of time to avoid penalties, so you may need to do some research yourself, which you have already done a little of. In general expect to pay around 15% of your net pay in self-employment taxes. What percentage you’ll owe in income tax is of course dependent on how much you end up making due to the progressive tax brackets and standard deduction.
Also, keep track of any expenses that are related to your job. In the next ten years, employees will be unable to take unreimbursed expenses as deductions due to the new Tax Law, but if you’re self-employed, that doesn’t affect you. Anything that you have to buy for the job that they don’t pay for can be deducted, as long as it’s required for the specific job and not something general like laundering your dress shirts that are suitable for work anywhere (laundering a uniform, however, would be deductible). If you mostly work at home, then you might get more use out of contacting a CPA to get them to go over all the deductions available for that.
I am a CPA, but not your CPA, and the above constitutes only general advice that would be given to anyone being paid on a 1099.
My wife, who is a freelance writer, has had her quarters show up on her Social Security benefits summary that correspond to the Self Employment tax she has paid.
Which is the standard social security employees pay and the employer contribution.
An accountant talked me into incorporating about six years ago. It ended up costing me way more money than it saved. On average, being a corporation cost me about $1,000 per year and only saved me about $200 on taxes. Switching back to a sole proprietorship is costing me another $1,000 in fees and paperwork. My new accountant says that incorporating only makes sense if your Schedule C has been showing a profit of $100,000 or more each year.
But, closer to the OP’s question, the reason most people incorporate under subchapter S is to avoid paying the self-employment tax. And if you don’t pay the SE tax, you don’t get credit towards retirement. So this advice would sabotage the OP’s goal.
However, you can do many things with a C corp you can’t as an individual, including contributing to a SEP IRA. Which is why the OP should talk to an accountant.
Setting up a C Corp for a small part-time consulting gig is rather extreme. I would recommend getting a second opinion if any accountant tried to push that on you.
If an accountant told you that you should get a new accountant. My wife has contributed to her SEP for 20 years now, on advice from an accountant.
The amount you can contribute depends on income for the year, but you have up to April 15 to contribute, so you have time to figure it out.
Okay, I was wrong about the SEP IRA and S corps–that’s why I have an accountant. I have a C corp for many reasons, I didn’t get it so I could open a SEP IRA. Just trying to give the OP some idea of other options, which of course he should discuss…with an accountant.
There is no reason to have a small C-Corp now. The one advantage that they used to have over S-Corps was if your income was in the lowest tax bracket for corporations, the overall tax on the profit plus qualified dividends was less than the tax you’d pay if you went with an S-Corp if you fell into the right bracket. Keep in mind that they would probably have significant wages from the job pushing them into higher marginal brackets for ordinary income, but still only pay 15% on qualified dividends plus 15% on the Corp level. Since one of those 15%s is being taken of a smaller number, even being in the 28% bracket would put you very slightly ahead (.85 * .85 > .72). Now that C-Corp tax rates are no longer progressive, there’s no point. With the Qualified Business Income Deduction, S-Corps got the same sort of tax cut that large C-Corps did, while small C-Corps had their tax rate RAISED.
We generally recommend someone be taxed as an S-Corp if they would save significantly more in self-employment taxes than they would otherwise pay on a schedule C, enough to justify having an accountant do a separate return as well as file the paperwork electing to be an S-Corp. But you do not have to incorporate under state law, unless you think forming an LLC is “incorporating” (Hint: it’s not). An LLC is not a corporation (the C stands for “Company”) but can elect to be taxed as an S-Corp and file an 1120S instead of what they would be otherwise file (Schedule C or 1065 depending on the number of members). The break-even point is not obvious, so it depends mostly on how serious the person is going to be in using it as a source of income. If it’s just a side hustle, there’s no need, partly because the 1120S tax return would be fairly simple and not worth what it would cost in terms of the accountant’s overhead time (processing a very simple return often takes longer than preparing the return; you can’t shortcut any of the office procedures just because it’s simple). If it’s going to be your main gig and leave you comfortably middle class, then it certainly makes sense. I don’t know where Riemann’s “job” falls on that spectrum, but I’m fairly sure that given he calls it as part-time and says he’s retired, I don’t expect it to be particularly lucrative.
The Qualified Business Income Deduction is available for those with a Schedule C, and it’s better to use as a Schedule C since you also get the deduction on whatever you pay self-employment tax on. If you’re an S-Corp, whatever you pay yourself on your W-2 to satisfy the IRS requirement that you pay yourself a reasonable wage does not count as business income for the purpose of that deduction. Similarly as a partner in a partnership, neither your guaranteed payments as a partner nor any other salary you draw are considered business income. But as a Schedule C, the entirety of your business income, including what you would pay yourself if there was a separate entity involved, is eligible for the 20% deduction. Thus the deduction tips things slightly out of favor of forming an S-Corp, so you better be saving a lot of self-employment tax to do it.
As to the fact that Riemann is doing this specifically to pay self-employment tax, well, I’m not really sure exactly how the formula works for those that have very few years worked, but in general self-employment tax is only a good “investment” if you don’t make very much money. Anyone who makes above a subsistence wage will not be getting out of the system more than they put in considering compound interest. But perhaps because Riemann doesn’t have that much work history, regardless of how much he makes now, his creditable wages will be low enough such that he’s still in the lowest part of the piece-wise linear function (there are two “bend points” - I’m not sure where they exactly are though) where they map your earnings to your SS benefit. Once you get to the first bend point, SS stops being a good “investment”. The amount you need to get 4 quarters of credit is not very much and was mentioned upthread.