Protection & Advocacy Inc. - Publications - Social Security, SSI, SSDI - Independent Contractor and Self-Employed: Reporting Earned Income to Social Security, English

5405.01
June 2003

Protection & Advocacy, Inc.

Independent Contractor or Self-Employed:
Reporting Earned Income to Social Security

This information packet is for people who receive earned income as an independent contractor or as a self-employed person. Independent contractors are considered to be self-employed. Checks for services to self-employed persons do not have any deductions. If you are an employee and receive paychecks with deductions taken out, see the separate information sheet entitled “Reporting Changes in Employee Earned Income to Social Security.”

If you have questions about your disability benefits and earned income, call PAI at its toll-free number 1-800-776-5746 and ask to speak with our Social Security and Work Advocate. You can also visit the Social Security website covering disability benefits and work at www.ssa.gov/work/index2.html or the SSI and work page on our website at www.pai-ca.org. Social Security’s “Red Book on Employment Support” is available on the Social Security website at www.ssa.gov/work/ResourcesToolkit/redbook_page.html. Copies are available from your local Social Security office. Ask for The Red Book. There are Social Security regulations cited below. You can see those regulations at www.ssa.gov/regulations/index.htm#top. Click on “Code of Federal Regulations.” Or go to your local library and ask for help from the Reference Librarian.

You must keep your own records because you cannot count on Social Security's filing or record keeping system. If you receive Supplemental Security Income (SSI) or Social Security Disability Income (SSDI) benefits, you must:

i Keep a copy of everything Social Security sends you. Save the envelopes!

i Keep a copy of everything you send Social Security.

i Take notes whenever you talk to someone at Social Security or whenever you meet with someone at Social Security. Write down the person's name, what you talked about and the date you talked or met.

We recommend that you three-hole punch your papers and put them in a notebook. We also recommend that you three-hole punch a manila envelope and put the envelope in your notebook so that you have a secure place to keep your check stubs and receipts.

Special Earned Income Rules for People Who Are Independent Contractors or Self-Employed

Self-Employed Persons who have to report and pay a Social Security Self-Employment Tax: You do not have to report or pay Social Security self-employment taxes if the total of your net income from self-employment is less than $400 in a year. 20 C.F.R. § 404.1096. If your total income from self-employment in a year is $400 or more, you have to pay Social Security self-employment taxes in an amount equal to 15.30% of your total net income from self-employment, not just the amount above $400. Enclosed is information from the Social Security website about self-employment. http://www.ssa.gov/pubs/10022.html (January 2003).

As explained in the enclosed information from Social Security, if you pay Social Security taxes you deduct 50% of what you pay from your earnings so that you are in the same position as an employee. If you are an employee, the employer pays half of your Social Security taxes.
Note: Reporting for purposes of paying a self-employment tax is totally separate from reporting obligations because you receive SSI or Social Security disability benefits.

Gross Income and Net Earnings from Self-Employment (NESE): When you get a paycheck, Social Security counts your gross income before any deductions. However, if you are an independent contractor or self-employed, your income may not be the amount of any check you receive but a lower amount. Social Security counts only your net earnings from self-employment or NESE. Net earnings would be the amount of your independent contractor/self-employed checks minus any business expenses that would be allowed by the Internal Revenue Service (IRS). In addition, if you paid a Social Security tax, you deduct 50% of the Social Security tax paid. IRS sometimes calls the amount after deducting allowable business expenses and half your Social Security taxes as your “adjusted gross income.” This is the amount you would pay income tax on if your earnings were high enough. See the enclosed Social Security publication and 20 C.F.R. § 404.1080, 404.1081, 416.1110(b).

Determining Countable Income and Reporting Under the SSI Program

If you receive SSI - how Social Security counts self-employment income: If you are self-employed, Social Security counts your NESE. Social Security adds together your NESE for the time you are self-employed within a calendar year, or for the whole calendar year if you are self-employed during all of that calendar year. Social Security then divides your NESE by the number of months you were self-employed, or by 12 if you were self-employed during all of the calendar year. 20 C.F.R. § 416.1111(b). This calculation gives you the amount of your NESE attributable to each month. From that amount you can take the work incentive deductions to determine your countable income.

Example: You receive only SSI and have no other earned or unearned income. You have a contract with an agency to do consultant work. The contract runs from July 1, 2001, to June 30, 2002. The contract says that when you do consultant work, you will be paid $120 a day. You work three days in the six months between January 1 and June 30, 2002. Assume you had no business expenses. (Because your self-employment income is less than $400 in a calendar year, you do not have to report or pay Social Security self-employment tax.) This is how your income would be treated under the SSI program:

Your earnings of $360 for calendar year 2001 would be divided by the number of months covered by the contract: $360 divided by 6 months (July through December) = $60 earned income for each month.

You determine your countable earned income the same way you would do if you were employed and your gross income each month is $60:

Gross earned income $ 60.00

Less $20 any-income deduction* (20.00)

Less $65 earned income deduction (65.00)

Less Impairment Related Work Expenses (IRWEs) - 0 -

Subtotal $ - 0 -

Less 50% of the subtotal - 0 -

Less Blind Work Expenses - 0 -

Countable SSI Income $ - 0 -

*If you have any unearned income, the $20 any-income deduction is taken first from unearned income

If you receive SSI - Reporting your self-employment income to Social Security: SSI regulations say that you must report to Social Security any change in income as soon as possible but by no later than 10th of the month following the income change month. See 20 C.F.R. §§ 416.704 through 416.714. Your SSI could be suspended or reduced if you do not report income changes to Social Security. The earned income you report is your NESE – your gross receipts less IRS allowable reasonable business expenses less 50% of any Social Security taxes paid. If there is no change from the prior month, you do not report.^{^[1]} Although you have until the 10th of a month to report changes in your income the prior month, we recommend you get the change information to Social Security as soon as possible and at least by the 5th of the month. The income you receive may reduce the amount of your SSI. See The Red Book.

Net Earnings from Self-Employment (NESE) and Substantial Gainful Activity (SGA) and Trial Work Period (TWP) months for People Who Receive Social Security (Title II) Disability Benefits; Reporting Requirements

If you receive Social Security (Title II) benefits such as Social Security Disability Insurance or Child Disability Benefits: Social Security regulations say you must report work activity and earnings. 20 C.F.R. § 404.1588. That means you must report your net earnings from self-employment when you first receive any self-employment income. Thereafter you report whenever your net earnings increase or your self-employment work activities take more than 80 hours a month. If in any month you have net earnings that average more than $570 in 2003 or you work more than 80 hours, regardless of the amount of earnings, that month would count as a trial work period (TWP) month. 20 C.F.R. § 404.1592.

If you have eight trial work months within the past 60 months, any subsequent month with net self-employment earnings of more than $800 a month (or $1330 if blind), after any IRWE deductions, may trigger termination of your SSDI or Disabled Adult Child (DAC) benefits, even though you are someone who is working even though still disabled. Your Medicare benefits would continue. See The Red Book.

If You Receive Both SSI and Title II Benefits

You need to report to both the SSI and Title II units. They do not talk to each other. Send a copy of anything you send to the Title XVI SSI unit in a separate envelope to the same address, but write on the copy "Attention Title II Unit." Make certain that your records show that you sent a report to both the Title II SSDI Unit and to the Title XVI SSI Unit.

Note About Annual Increases in SGA and TWP Thresholds

Each year Social Security usually will increase (a) the amount you can earn before the earnings may count as “substantial gainful activity” or SGA for both the disability and blind Title II Social Security programs, and (b) the amount you can earn before the earnings mean the month is counted as a trial work period month. 20 C.F.R. §§404.1574(b)(2)(ii), 404.1592(b)(2)(ii).

Special Deductions for Certain Work Expenses

Impairment Related Work Expenses (IRWEs) are out-of-pocket expenses you have both because you have a disability and because you work. 20 C.F.R. §§ 404.1576, 416.976; The Red Book. This deduction is available to persons who qualify for disability benefits. Examples include attendant care assistance while at work or getting ready for work, transportation costs if you are unable to use or rely on public transportation because of your disability, attendant care assistance while you work, to get you ready for work and to help you on returning home from work. IRWEs can include out-of-pocket medical expenses related to your disability if necessary to help you work or to continue to be able to work even if you would have those same expenses if you were not working. See The Red Book for more examples.

IRWEs for people who receive SSI: IRWEs that you pay for yourself can be deducted from your earned income. Your countable income – the amount by which your SSI grant would be reduced – is determined after deducting IRWEs along with other earned income deductions. This deduction is available to persons who receive SSI on the basis of disability, not blindness. It is also available to persons who receive SSI on the basis of age (65 or older) but who have a disability and received SSI on the basis of disability in the month before their 65th birthday. 20 C.F.R. 416.1112(c)(6).

IRWEs for people who receive Social Security (Title II) benefits based on disability or blindness including Social Security Disability Income (SSDI), Disabled Adult Child or Child Disability Benefits (DAC or CDB) or Disabled Widow Benefits: IRWEs you pay for yourself are deducted from your earned income before looking to see if your income is high enough to indicate that your work may constitute substantial gainful activity or SGA.

Your IRWEs are deducted from your net earnings from self-employment to determine if your earned income after IRWEs is more than $800 (if you receive benefits on the basis of a disability) or more than $1330 (if you receive benefits on the basis of blindness). 20 C.F.R. §§ 404.1574(b) (1), 404.1576. IRWEs are not deducted from earnings to see if a month counts as a trial work period month.

SSI Blind Work Expenses: Persons who receive SSI on the basis of blindness are not eligible to deduct Impairment Related Work Expenses. They are, however, able to deduct blind work expenses which is any expense reasonably related to working. That would include most IRWEs plus other expenses related to working which are not impairment related (mandatory deductions for taxes or pension contributions, bus fare, uniforms, equipment, meals when at work, etc.). For more information, see The Red Book. This deduction is available to SSI recipients under age 65 and to persons 65 and older if they received SSI in the month before their 65th birthday. 20 C.F.R. 416.1112(c)(8).

Notes: Some expenses may satisfy the rules for a business expense deduction when determining net earnings from self-employment (NESE) and as an Impairment Related Work Expense (IRWE) or a Blind Work Expense (BWE) deduction. You can deduct an expense just once. There would be no bottom line difference between deducting an expense as a reasonable business expense or as an IRWE. However, while Social Security will not recognize IRWEs paid for in a month in which you did not receive earned income, there is no such limitation with respect to IRS allowable business expenses.

One reason for calling an expenditure an IRWE rather than a business expense is if you need additional quarters of work to qualify for Social Security benefits. Earning including net earnings from self-employment that total $890 a year in 2003 counts as one quarter. Earnings totaling $1780 or more count as two quarters, etc., up to a maximum of 4 quarters credit in a year.

Persons who qualify for SSI on the basis of blindness are better off deducting an expense as a blind work expense rather than as a business expense. This is because a blind work expense is deducted after the 50% work incentive deduction. IRWEs are deducted before the 50% work incentive deduction.

Questions? Call 1-800-776-5746 and ask for PAI’s Social Security and Work Advocate.

Reporting Net Earnings from Self-Employment to Social Security & How to Use the Attached Forms

If you receive SSI: There are many changes you are required to report to Social Security. 20 C.F.R. § 416.708. Among the changes you are required to report is any increase or decrease in income. 20 C.F.R. § 416.708(c). You are required to report any change including an increase or decrease in income by no later than the 10th day of the month following the change month. 20 C.F.R § 416.714(a). We recommend that you report the change sooner than the 10th day if you can. If you do not report by the 10^th, Social Security has the authority to penalize you by reducing or suspending your SSI. 20 C.F.R. §§ 416.722 through 416.730.

If you receive Title II Social Security benefits on the basis of disability: Social Security regulations say that you must promptly tell Social Security if you start to work (including work as an independent contractor or self-employed person). Thereafter you are required to report any increase in the amount of your work (i.e., increase in the number of hours worked) or in the amount of your earnings. 20 C.F.R. § 404.1588. You also should report any decrease in the number of hours worked or the amount of your earnings. If your self-employment stops, report that also.

Do not delay reporting earned self-employment income because you have not determined your business or other deductions: Just hand write on the form letter you send to Social Security something like “deductions not yet determined.”

Advantages of reporting to Social Security: People report that when they take charge of reporting to Social Security, they feel more confident, less fearful in their dealing with Social Security. They report that Social Security is more respectful of them. People report that when they are the ones to file reports rather than wait for Social Security to ask them for information, they feel more in control.

Forms to be used by SSI Recipients:

Two-Page Form entitled “SSI Recipient – Report of Self Employment”

Letter Form: Fill in the address of your Social Security office and information about you after the "re." After #(1) fill in the month and year of the first month this current year that you were self-employed. That would be January if you were self-employed last year and continued to be self-employed this year, or if you started in January. After the #(2) enter the first month this year that you received self-employment income. That may be the same month as you entered after the first bullet or a later month. After #(3), enter “unknown” if you do not know how long the self-employment will last. At this point make many copies of the form. We recommend you three-hole punch the copies and place them in a binder.

Each month fill in the date you are signing and mailing in the form. The entries for #(1), (2) and (3) already should be filled in. After #(4), fill in the month you are reporting to Social Security about and the gross income (before any business deduction) received in the month you are reporting about. If this is the first month of the year you are making a report, the month entered in #(2) and #(4) will be the same. Photocopy the checks or check stubs paying you for your work. Attach the photocopies to the papers you are mailing in to Social Security. If you paid Social Security self-employment taxes, attach something that shows the amount you paid.

Itemization Form: Fill in information about your gross receipts (i.e., the checks you get for independent contractor or consultant work). Write in the date you received a payment, who you got the payment from, and the amount. In the block below, fill in information about any business expense deductions (i.e., cost of phone calls, travel, supplies). In the bottom block, fill in information about IRWEs or Blind Work Expenses. Keep this page in your notebook and update it as you have income or expenses. Send in a photocopy of this sheet, together with page one, each time you report. Staple copies of income checks and expense receipts to the original of this form - or put them in a manila envelope you keep in your notebook.

Be sure to keep a copy of what you mail or give to Social Security. That includes a copy of the form letter and a copy of the itemization form. Although you are keeping the original of the itemization form in your notebook and adding to it as you receive income or have business expenses, you need a copy of exactly what you sent to Social Security. Write down on your copy the date it was mailed – i.e., “put in the mailbox December 1, 2002.” Bring your notebook with you whenever you visit the Social Security office.

Form entitled “SSI Recipient – Final Report re Self-Employment”

This is the form you use when you finish a period of self-employment – for instance, if you have been working as an independent contractor or consultant under a contract that has expired or run out of time. You send this completed form in together with a copy of the itemization you used for earlier reports.

Form to be used by Social Security Disability recipients (SSDI, DAC, disabled widows):

Fill in the address of your Social Security office and information about you after the "re." Fill in the first month in a calendar year that you were self-employed. Make many copies of the form. We recommend you three-hole punch the copies and keep them in your notebook.

You must report the first month you have any net earnings from self employment. Thereafter you report if you have any increase in the amount of your net earnings from self-employment. You also report any month in which your work activity took more than 80 hours. Net earnings from self-employment of more than $570 a month in 2003 or working more than 80 hours in a month in your self-employment means that those months would count as a trial work period month. We also recommend that you report your net earnings from self employment for months in which your income goes down. If you have not had nine months that count as trial work period months, it is important that you report any month following a trial work period month where your income drops to $570 a month in 2003 or less or your hours of work activity drop to 80 hours a month or less.

For each month that you report about, mail in the filled in and signed letter form together with a copy of the itemization form. Enter the date you are signing and mailing the form on the top of the letter form. In the second paragraph of the letter, enter the month you are reporting to Social Security about. Check whether your work takes 80 hours or less or more than 80 hours a month. Photocopy the checks or check stubs paying you for your work and send in the photocopies with your letter.

On the itemization form, enter any self-employment payments as you receive them. In the first block, enter the date received, who paid you, and the amount. Make a copy of the check or check stub to send with your papers to Social Security. Keep the original in an envelope in your notebook. In the second block, fill in information about any business expense. In the third block, fill in information about any IRWEs. Keep any expense receipts or cancelled checks in an envelope in your notebook. Keep your original in your notebook.

Never, never mail your original check stubs or receipts or cancelled checks unless you send them return receipt requested! Our experience is that many things sent to the Social Security office never make it into your file.

Date Paid	Amount Paid	Date Paid	Amount Paid

Date Paid	Amount Paid	Date Paid	Amount Paid

Date Received	Source	Amount

Date Received	Source	Amount

Date Received	Source	Amount