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I'll post this elsewhere also:

Someone is age 27 and self-employed. Main occupation is making a product and selling it directly to the customer, working out of the house, sometimes dealing only in cash. Yes, its a legal product, no drugs involved.
Self-employed income for 2010 was not enough to maximize Social Security credits. So, is it better to report a higher income on the tax return to maximize the Social Security credits? I'm assuming Social Security will still be around when this person becomes of age to collect, with no reduction in benefits.
The main disadvantage would be paying more in income taxes, but that would be a small amount. A minor disadvantage would be if there was an audit (highly unlikely) and the auditor wants to see paperwork to back up the reported earned income.
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personally I think there are more disadvantages.......I think the retirement age could be moved again....or the amount per retiree lessened......I think a Roth IRA is a better place for such monies.....

beyond that what if an emergency came up and he needed the money??? etc....

SS could even become taxable.....

but I do think you are right to assume SS will not disappear.....

the best thing that could happen for SS is the income cap of $109k....the most earned income that could be taxable be removed....so that all earned income is taxable and the rate of taxation be reduced from 11% this year to something considerably less such as 5 - 6%.......meaning upping the amount he pays on purpose would be rather silly after such a possible change.......

Dave
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Your benefit in retirement is determined by your earnings history. I have not seen an analysis, but the increased SS and income taxes you pay may be balanced by your additional benefit in retirement. But at age 27, that benefit is so small, who knows if it will matter.

I suspect this matters most if you happen to become disabled and collect under SS disability.

Every cash business out there is potentially a gray market business. All have this question. I don't know if there is a good answer.
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Run your business ethically, and legally.

This means you report all reportable income and pay whatever taxes are due on it, after taking all deductions and credits permitted.

Being creative and aggressive in tax matters is fine. Tax evasion which violates the law (such as not reporting some of your cash income, which is what you seem to be implying as an option--my apologies if I misinterpreted your post)is not fine.

If the tax bite bothers you, there are perfectly legal and ethical ways of shifting income from one tax year to another, some of which you may be able to use. Or, you can take that money and actually use it to grow your business, such as investing in new technology, which for a small business should be 100% deductible in the year of the expenditure.

Another thing you may not be aware of, but looking at the big picture, you are better off reporting higher gross and net income on your tax return than lower. If you ever need a bank loan to expand your business, they look at things such as your tax return. Higher income is better than lower.

But the main reason to not cheat on your taxes, if that's what you're contemplating, is that whatever you gain by doing so (a few dollars at most), is not worth the loss of your personal integrity.
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""Run your business ethically, and legally""

Great advice, I think I'll take it.


I'm also going to turn all my illegal fireworks over to the authorities and swear off gin.
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I think this is your answer. It is a pretty low bar.

Special rules for earning Social Security coverage apply to certain types of work.

If you are self-employed, you earn Social Security credits the same way employees do (one credit for each $1,120 in net earnings, but no more than four credits per year). Special rules apply if you have net annual earnings of less than $400. For more information, ask for If You Are Self-Employed (Publication No. 05-10022).

<snip>
Anyone born in 1929 or later needs 10 years of work (40 credits) to be eligible for retirement benefits. People born before 1929 need fewer years of work.
http://www.ssa.gov/pubs/10072.html

I see no advantage to tweaking reported income because it is likely he/she has already capped out. 40 credits should be relatively easy to earn if he/she is earning enough to have to pay taxes.

jack
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I thought the 40 credits was the minimum to get any retirement benefits, while the size of the retirement benefit varies as a function of total FICA earnings (which goes a lot higher than that minimum). I think the original question involved getting the credit for the maximum contribution to get the maximum payment later.
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Max credit per year = 4, you cap out. I did not look up to see if more after 40 is better. The only way to get more would be to work for more than 10 years amount earned is not a variable once the cap is hit. This is actually an important feature of SS it was built so that all income earners could fully participate.

jack
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Max credit per year = 4, you cap out. I did not look up to see if more after 40 is better. The only way to get more would be to work for more than 10 years amount earned is not a variable once the cap is hit. This is actually an important feature of SS it was built so that all income earners could fully participate.

The credits that you are talking about are the credits that allow you to participate in the program, and draw retirement income once you reach 62. Once you earn $1120 in a quarter, you have earned a credit for that quarter, so earning a credit is a pretty low hurdle. Once you earn 40 credits (10 years at 4 credits per year), there is no advantage to having additional credits to be able to participate in the program. http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/73/kw/40...

However, assuming that you are eligible to participate, the retirement income that you get is calculated based on the 35 highest earning years in your earning history. http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/61/kw/ho...

So, at least up to the cap amount ($106,800 this year - increases based on inflation http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/240 ) there IS an incentive to have a higher income, as the future benefit could be increased. However, as another poster pointed out, a 27 year old's 'full retirement age' is currently 67 (and has the potential to be increased) http://ssa-custhelp.ssa.gov/app/answers/detail/a_id/14/kw/fu... so at 27, there are at least 40 more potential earning years that can be counted toward the highest 35 years. So, unless there are plans for early retirement, or dropping out of the workforce to attend school or some other reason, maximizing income for this particular year may be somewhat futile.

AJ
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