Understanding Earnings: A Comprehensive Guide to Wages, Self-Employment, and Social Security, § 404.429

Navigating the world of earnings, particularly with respect to Social Security and self-employment, can be confusing.

This blog post aims to simplify and explain the concept of earnings as it relates to wages, self-employment, and Social Security by breaking down the relevant legal provisions.

1. Definition of Earnings: Earnings generally refer to the sum of wages for services rendered in a taxable year, net earnings from self-employment, and any net loss from self-employment for the same taxable year.
2. Net Earnings or Net Loss from Self-Employment Net earnings or net loss from self-employment are determined under specific provisions in subpart K, with some exceptions and inclusions related to trade or business occupations, such as public office and various professional services.
3. Earnings Test and Exclusions: For the earnings test under Social Security, certain royalties and self-employment income may be excluded based on retirement age and other factors. It’s important to note that royalties and other self-employment income are presumed countable unless shown otherwise.
4. Significant Services: In the context of self-employment, certain activities are not considered significant services, such as actions taken after entitlement to sell a crop or product, activities to protect an investment in a currently operating business, or activities that are too irregular, occasional, or minor.
5. Calculating Net Earnings or Net Loss from Self-Employment: In determining net earnings or net loss from self-employment, all net income or net loss is counted, regardless of personal services performed, net profit amount, or whether the net profit is reportable for social security tax purposes.
6. Net Earnings and Allowable Deductions: Net earnings from self-employment are calculated as the excess of gross income over allowable business deductions, as determined under the Internal Revenue Code. Net loss from self-employment is the excess of business deductions over gross income.
7. Definition of Wages: Wages include the gross amount rather than the net amount paid after deductions by the employer for items such as taxes and insurance. Certain types of wages excluded in subpart K are also included, such as remuneration in excess of annual wage limitations and payments for agricultural labor.
8. Presumptions Concerning Wages: For the purposes of earnings, certain presumptions are made regarding wages reported during a taxable year, such as that they were paid for services rendered in that year, unless evidence is presented to the contrary.

Let’s consider an example to illustrate how earnings, wages, and self-employment are calculated and how they may affect Social Security benefits.

Meet Jane, a self-employed graphic designer. In 2023, she earned a total of $80,000 from her design business. She also received $10,000 in royalties from a design book she published before reaching her full retirement age. Jane had $20,000 in allowable business deductions for her design business.

To calculate Jane’s earnings for the year, we will first determine her net earnings from self-employment. This is calculated by subtracting her allowable business deductions from her gross income:

$80,000 (gross income) – $20,000 (allowable deductions) = $60,000 (net earnings from self-employment)

Since Jane reached her full retirement age before the last day of the taxable year, her royalties of $10,000 are excluded from her gross earnings from self-employment for the earnings test under Social Security.

Jane’s total earnings for the year are the sum of her net earnings from self-employment, minus any net loss from self-employment for the same taxable year:

$60,000 (net earnings from self-employment) = $60,000 (total earnings)

In this example, Jane’s total earnings for 2023 are $60,000. These earnings will be taken into account when calculating her Social Security benefits and taxes.

Conclusion: Understanding the concept of earnings is crucial when navigating the complexities of wages, self-employment, and Social Security. By familiarizing yourself with the relevant legal provisions, you’ll be better equipped to manage your income and benefits.

https://www.ssa.gov/OP_Home/cfr20/404/404-0429.htm