By Lori Ioannou
Nov. 15, 2022
U.S. seniors are facing a double whammy. Inflation has eroded their spending power, and this year’s dismal stock market has put a big dent in their nest eggs. The Center for Retirement Research at Boston College calculates total wealth lost from individual retirement accounts and 401(k)s since the beginning of the year at $3.3 trillion.
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As a result, many seniors will be tempted to take on side jobs to supplement their primary employment or other source of income. A survey conducted in August by Alignable, a networking platform for small businesses, found that among U.S. residents 62 and older, 51% reported earning $1,000 to $5,000 a month from side jobs, while 16% were earning between $5,100 and $20,000 monthly.
But while an additional job can bring in extra income, many seniors aren’t aware of some common pitfalls that come with this territory, such as the risk of paying more in taxes, or reducing one’s benefits.
“Many retirees lose their minds over this stuff,” says Elliot Dole, a wealth adviser at the Buckingham Group in St. Louis. “It comes as quite a surprise.”
Here’s what you need to know.
TAXES
If you’ve recently started working for yourself, the first place you are likely to get hit is on taxes. Any income over $400 a year is taxable and needs to be reported to the Internal Revenue Service. Even if you’re working for someone else, if you have a job where taxes aren’t being withheld, you could get hit with a big surprise at tax time.
Estimated quarterly tax payments are a good place to start. If advance payments aren’t made, the IRS might impose penalties. A good rule of thumb is to set aside 20% to 35% of cash flow in a side account to help offset taxes and other business expenses, tax experts suggest.
Terri Heimann Oppenheimer, 61, a former advertising executive who is now a ghost writer and editor earning about $6,500 a month as a freelancer on Upwork, says she gives her accountant money for her taxes quarterly “and that takes care of everything.”
Matt Cates, a retired Air Force veteran in Corvallis, Ore., who says he earns $2,500 a month writing content for websites that hire him through Upwork, also suggests that people in business for themselves keep tax bills in mind when determining how much to charge clients.
It’s also important to keep track of all business expenses to take advantage of business deductions. Besides home-office and business-expense deductions, you can deduct health-insurance premiums, including age-based premiums for long-term care coverage as a self-employed person.
“This is a great cost-saver for seniors that is often overlooked,” says Matthew Lincoln, a certified financial planner, tax adviser and enrolled agent in Frederick, Md.
MEDICARE
Increases in Medicare premiums can be another surprise for seniors who boost their incomes with side jobs.
Monthly premium costs are determined by your income in the tax year two years prior. Thus, if you are now on Medicare or will be in two years, your adjusted gross income this year will be used to determine your Medicare premiums in 2024. And premiums can increase by hundreds of dollars if your annual income rises above certain levels.
For Medicare Part B premiums, with a modified adjusted gross income of $91,000 or less when filing as an individual, or $182,000 or less when filing jointly, the standard monthly premium this year is $170.10. Part B covers services from doctors and other healthcare providers, including outpatient and home healthcare. It jumps to $238.10 for single-filers in the $91,000-to-$114,000 range, or $182,000 to $228,000 for joint filers. And the scales keep rising from there. Part B premiums increase to $544.30 a month for annual gross income of $170,000 to $500,000, or $340,000 to $750,000 when filing jointly. Monthly premiums for Part D, the Medicare prescription drug benefit, can rise in a similar fashion.
Mr. Dole, the wealth adviser, says he has a client, a 71-year-old retired attorney, who started working again this year part time, teaching in an early-childhood education center. She will have earned roughly $30,000 by the end of the year.
Two years from now, as a single-filer, Mr. Dole’s client will see that additional income push her monthly Medicare premiums from $340 to $442. And her premiums will rise again, to $544, in 2025, he says, two years after she starts taking required minimum distributions from her retirement account. She paid almost no tax in some really low-income years after she first retired, Mr. Dole adds, but “that was the quiet before the storm.”
SOCIAL SECURITY
For many older Americans, side jobs help put off the day they start collecting Social Security benefits. Benefits paid out increase 8% a year for each year that someone waits past full retirement age, up to age 70.
Some can’t wait, or choose not to wait. It’s possible to start collecting benefits at age 62. You also can continue to work after you start collecting benefits.
However, and this is key: Before you reach full retirement age, and in the year you reach that age, your Social Security benefits can be reduced if your income two years prior exceeded certain levels. In 2022, $1 in benefits is deducted for every $2 you earned above $19,560 in 2020. In the year you reach full retirement age, $1 is deducted for every $3 you earn above $51,960. After you reach full retirement age, however, you get full Social Security benefits no matter how much you earn.
“These days more people are wondering how to manage this earning limit,” says Matthew Allen, chief executive of Social Security Advisors, an advisory firm in New York that helps clients maximize Social Security benefits.
Cheryl Hinton, 64, retired in August from a full-time job as a patient-care coordinator at Advent Health in Tampa. On the side, meanwhile, for more than 20 years, she has sold vintage clothing and collectibles online. She estimates that over the past year, roughly, her side hustle has brought in between $1,000 and $1,500 a month.
Ms. Hinton says she plans not to touch her savings unless there is an emergency, and to wait until she reaches her full-retirement age, in 2025, to start collecting her Social Security benefits. So far, she has been able to cover her monthly household expenses. “Without any emergencies, I have enough in savings to last at least a year,” she says.
“Often people are surprised” by a hit to their benefits, Mr. Allen says. Keep in mind you can file an appeal with Social Security if a life-changing event, such as a divorce, death of a spouse, or job loss has slashed your income since the year that was used to determine the benefit reduction.
SEP IRAs
One way to avoid tax surprises and benefit reductions is to open an SEP IRA, or simplified employee pension individual retirement arrangement. These variations on IRAs are used by business owners as retirement-savings vehicles for themselves and their employees.
There is no age limit on when you can set one up. A self-employed individual can contribute 25% of their earned income, maxing out at $58,000 a year. Minimum distributions are required however, after age 72½.
Contributions are generally 100% tax deductible and investment earnings grow tax-deferred. Withdrawals after age 59 ½ are taxed as ordinary income. Withdrawals before age 59 ½ may incur a 10% IRS penalty as well as income taxes.
Another benefit: Earnings contributed to an SEP IRA are exempt from Social Security and Medicare taxes, Mr. Allen says. Contributions count as business expenses, too, he says, which helps to reduce net profit and taxable income for the business.
Ms. Ioannou is a writer in New York. She can be reached at reports@wsj.com.
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