Tax and social security for low income

Question

My friend works part time and made about $7000 in 2019. Some people have been telling them that she should file separately so she had record of taxes reported for herself and she would be able to collect social security. It sounded a bit off to me so I just wanted to get some confirmation. (FYI. Her husband works full-time and earns about 85K.)

• Would she have any taxes due?
• At that income level, does it matter for her if she files separately or not?
• Would she be paying social security tax? And, if not, from what I've searched online, you can't voluntarily pay into social security if you do not have any taxes due.

Thank you.

EDIT: Clarification

They are located in NYC.

She is what you would categorize as contract/freelance worker. She had no income tax or SS tax or Medicare tax withheld. She received 1099 for her earning. No W2. Since she has no taxes due, I am guessing that she won't be able to pay into SS, which means she won't be eligible for SS until she earns enough to pay taxes and matches other eligibility requirements.

BTW, what is the income amount that she'll need to start paying taxes? Is it when she earns above standard deduction?

Answer 1

'Some people' should stick to what they know.

At $85K, a single filer has a standard deduction of $12,200, so, say $73K taxable, and tax due, nearly $12K.

VS the married, joint filer, total $92K income, $24.4K std deduction, about $68K taxable, and tax of $7800.

The friend would lose the benefit of the larger standard deduction, i.e. more than her income, along with an unused 10% bracket. This is not rocket science.

She already is part of the social security system, and if her lifetime earnings were low, she's more likely to get a benefit based on hubby's earnings. That's the nutshell version. And;

• No
• Yes, see above
• She does pay in, based on her income. It starts with dollar one, not from tax due.

You are a good friend to help her. Tell the others to start reading up on how this all works, it's not a secret.

To Dilip's point - If she is working 'off the books', the question changes a bit. While I can't encourage someone to evade taxes, she, as well as the combined couple, would still be worse off if she claimed this income, let alone did it by filing single. Can you clarify if this is the case? That she's paid off the books and not a W2 employee?

Answer 2

Your friend will absolutely need to claim that $7,000 of income as income, but it's fine for her to do this on the joint return with her husband. They'll need to file Schedule C and Schedule SE along with their 1040 to report the business income and they'll have to pay self-employment taxes in addition to normal income taxes on it. Self-employment tax is both the employer and employee contribution portions of Social Security and Medicare.

Note that this is not optional. That income must be claimed or else it's tax evasion. If you earn at least $400 of self-employment income, you must claim it and pay self-employment taxes, even if you didn't owe regular income taxes. However, in this case, they'll be paying both regular income taxes and self-employment taxes on it since their combined income is well over the standard deduction. The IRS already knows about this income because they get a copy of the 1099s from whoever is paying your friend. The IRS will be asking questions if your friend does not report that income. Since your friend is in NYC, they most likely also owe state and local taxes on this income.

If your friend is not familiar with business taxes, then it's likely worth using a tax preparation service and/or software that will guide them through the process. I have to pay self-employment taxes on some freelance side income, too, and, trust me, it can be kind of a pain. I do it myself, but I'm more familiar with taxes than average and I don't live in NY.

They should still file a joint return for all of the reasons listed in JTP's answer. They'll pay way more taxes if they file separately, since they'd be wasting part of her standard deduction and her husband's income would be taxed at a much higher rate. Social Security gets paid and knows about the income regardless of whether the return is joint or separate.

The Social Security Administration maintains a publication called If You Are Self-Employed that covers more detail on self-employment affects Social Security and how to file it appropriately.