Limiting Earned Income for Social Security Purposes

[mlr2016]

I recently had a questioned posed to me that I'd like some differing opinions on.  John Doe wants to start drawing social security before retirement age but continue to work (don't ask... sigh).  The problem is, the self employment income John makes is well above the social security earned income limitation.  Essentially, any benefit he would expect to receive would be wiped out. 

John talked with a few people and came up with the idea of terminating his sole proprietorship and then have his wife, Jane Doe, establish a sole proprietorship in her name.  She would collect all the revenue under her business and pay John an income below the social security threshold. 

My understanding is Jane would manage all the books and records and potentially control which jobs the business would accept/work on.  John would do all the manual work.  Now let's say for round numbers, the business pulls in $65k.  Jane would report the $65k on Schedule C under her business name, she would pay John $16k (2017 SS earned income limitation is $16,920) and report that as wages/compensation expense and in theory everyone would be happy.

My thoughts:
- This just seems like a red flag for the IRS to look at or am I too concerned?  Essentially, John is doing all the labor that generates the revenue.  One could easily deduce the merit or intention of this so called plan (i.e. shifting income from one spouse to another to subvert the SS earned income limitation).
- Are there any legality issues here that I can relay to him?
- Is there anything else I'm missing?  John seems to think it will work, but I'm apprehensive to say the least.

[SeattleCPA]

Er, isn't this really asking about how to cheat the system? Break the law?

BTW a tangential remark... a while back I did an ebook on saving for retirement... my goal was to create a super simple plan that could be described in a few words and basically couldn't be beat by any other simple plan. In the end, I came up with a thirteen word plan.

I asked several financial authors for comments and one of them William J. Bernstein wrote me a nice note and said some very kind things... but here's where this all gets back to this friend's scheme.

Bernstein (who's author of a bunch of great books including "If You Can") said he thought I needed to make a change which was to plead with people to delay taking SS benefits. He thought that is now a great option and something that greatly de-risks your and my long-term financial security.

So back to John Doe: What he should do rather than break the law is delay SS probably...

[mlr2016]

Er, isn't this really asking about how to cheat the system? Break the law?

BTW a tangential remark... a while back I did an ebook on saving for retirement... my goal was to create a super simple plan that could be described in a few words and basically couldn't be beat by any other simple plan. In the end, I came up with a thirteen word plan.

I asked several financial authors for comments and one of them William J. Bernstein wrote me a nice note and said some very kind things... but here's where this all gets back to this friend's scheme.

Bernstein (who's author of a bunch of great books including "If You Can") said he thought I needed to make a change which was to plead with people to delay taking SS benefits. He thought that is now a great option and something that greatly de-risks your and my long-term financial security.

So back to John Doe: What he should do rather than break the law is delay SS probably...

I absolutely agree, John Doe should delay taking SS... unfortunately it's in one ear and out the other.  Realistically, this is a guy that will more than likely have to work the rest of his life.  He's only a few years from traditional retirement age, took a huge hit with the market collapse in 09', pulled out of the market and then entered back into it once it had recovered.  All said and done, he has about $200k in retirement vehicles.

Back on topic now, cheating the system and breaking the law are two different things.  Is this truly breaking the law? Such as with tax, there are many code sections in place and multiple avenues around them (think inversions as the recent hot topic and the newly revamped 385 regs that were issued to curtail them), what some would call grey areas of tax.  I'm not trying to rationalize or justify his intentions, but if I could be pointed to some literature that advises against it or more importantly says "no, you cannot do this, it's against the law," it would be greatly appreciated.  I personally only deal with corporate taxes, so this kind of thing is outside my wheelhouse.  From the quick research I've done, I have yet to find anything to support my gut instinct.  Besides telling him this isn't a very good idea, I'd like to back up my statement with sound support.

[SeattleCPA]

Here's a link to an SSA page that provides resources for dealing with a  related problem--hiding self-employment income so someone can claim disability. This is very similar issue to hiding self-employment income so someone can get more retirement income.

http://oig.ssa.gov/audits-and-investigations/audit-reports/A-07-12-11268

I think you're fooling yourself if you think this is a "gray" area.

[mlr2016]

Here's a link to an SSA page that provides resources for dealing with a  related problem--hiding self-employment income so someone can claim disability. This is very similar issue to hiding self-employment income so someone can get more retirement income.

http://oig.ssa.gov/audits-and-investigations/audit-reports/A-07-12-11268

I think you're fooling yourself if you think this is a "gray" area.

Excellent link, thanks for sharing!  I truly appreciate your input.

[SeattleCPA]

You are welcome. Also, let me apologize for using the word "foolish"... I didn't mean that to be as mean as it now sounds.

Sorry...

[Reynold]

Here's a link to an SSA page that provides resources for dealing with a  related problem--hiding self-employment income so someone can claim disability. This is very similar issue to hiding self-employment income so someone can get more retirement income.

http://oig.ssa.gov/audits-and-investigations/audit-reports/A-07-12-11268

I think you're fooling yourself if you think this is a "gray" area.

What that link seems to describe is a situation where John continues to do everything for the business, and just has people make out the checks to Jane, who reports them as income on her SSN.  mlr2016 seems to be describing something different, Jane is now running the business and doing real work for it.  That seems more like the situation with figuring out what is a "reasonable" income to pay yourself in a C Corporation, what is a reasonable income for Jane's company to pay John?  It is probably more than $16k, but may well be less than $65k.  It might even be close to $16k, if he pulls that in for a few hours a week of work, say by making high end furniture.  I know someone who got paid about a little less than that for teaching Physics as an Adjunct at a Community College for a year, which took easily 10 hours a week and required a Master's degree in a technical field. 

Our plumber works that way, his wife answers all the calls, does the scheduling and billing, and he goes and plumbs.  He is much more efficient that way, there is a lot of overhead to that kind of thing, and she is great at followup (they got our business for being the first to return our call New Year's Day when we returned home, turned on water, and had a water line spring a leak behind an interior wall).  She probably deserves at least half the income from the business. :)