Hello Friends,

Many of you may not know this, but I have a pretty strong fear of heights.  However, a friend managed to convince me to try a little mountain climbing recently.  All I can say is I tried never to look down and managed to make it to the top.  As they say, the view was worth it but I’m not sure I will be repeating this any time soon!  Here’s a topic I get asked about on occasion.

People who are self-employed are increasingly dependent on the use of technology for both business tasks themselves and record maintenance. A self-employed Social Security Disability Income (SSDI) beneficiary or a Supplemental Security Income (SSI) recipient is often able to apply certain technological costs used in connection with their work activity as deductible expenses (as allowed by IRS) to arrive at their Net Earnings from Self Employment (NESE.) This is the amount that the Social Security Administration (SSA) uses in determining Trial Work Period (TWP) service months, Substantial Gainful Activity (SGA), and countable earned income for SSI.

Computer hardware, software, and supplies and phone equipment are the kind of costs that may be declared as a capital expense or a business deduction if used in a self-employed person’s business. A capital expense is normally the cost of getting started in business before actually beginning operations. A person can then recover the amount spent through depreciation, amortization, or depletion which allows a deduction of part of the cost each year. A person may elect to deduct or amortize certain business start-up costs.

To be deductible as a business expense, an expense must be both ordinary (common and accepted in the business) and necessary (helpful and appropriate for the business.) An expense does not have to be indispensable to be considered necessary. Normally, if an expense is used partly for business and partly for personal purposes, the business part may be deductible.

For specific tax issues a beneficiary should consult with a tax advisor and/or the Internal Revenue Service (IRS.)

Also remember that for SSA programs, an expense may possibly be used as an Income Related Work Expense (IRWE) or for a Plan to Achieve Self Support (PASS) but cannot be used more than once.

High up in Copper Canyon.

Dear Ben,

I get SSDI Childhood Disability Benefits on my disabled father’s record. What would be the effect on my benefits if I began trading stock and options, not as long term investments but closer to what would be considered day trading? I don’t want to violate any rules by trading stock and doing research in making a profit from my investments/trades. Would this be considered a form of entertainment like gambling at the casino is or more like self-employment?

Sid
Blackwell WI

Dear Sid,

You are not violating any Social Security Administration (SSA) rules by trading stocks and day trading; Social Security Disability Income (SSDI) beneficiaries can pursue whatever interests or enterprises they wish. However, if your activity is a business, SSA will look at it as self-employment and consider it to be work. The SSDI definition of disability is directly linked to a person’s capacity to do substantial work regardless of the nature of the person’s disabling condition; so if your activity is self-employment and substantial and sustained for a certain period of time, the possibility arises that you may be considered no longer disabled for SSA purposes and your benefits would stop.

SSA follows the Internal Revenue Service (IRS) regarding the definition of a business. Normally if a person intends to make a profit or produce income on a continuing basis from an activity, it is a business. (POMS RS 01802.001 ff)

Special IRS rules apply to traders in the business of buying and selling securities for their own account. If a trader regularly seeks to profit from daily market movements in the prices of securities and not just from dividends, interest, or capital appreciation, and if the activity is significant, it is a business and subject to self employment and FICA tax. (http://www.irs.gov/taxtopics/tc429.html)

Other factors that IRS considers in determining if trading is a business are: typical holding periods for securities bought and sold, the frequency and dollar amount of trades during the year, the extent to which the activity produces income for a livelihood, and the amount of time devoted to the activity. Consulting with a tax advisor or expert may be appropriate to clarify these issues and your options.

If your trading activities do not qualify as a business, you are considered an investor and not a trader, and you would not be self employed for IRS or SSA purposes (though any income realized would still be subject to regular income tax.)

If your trading activity is self-employment, then SSA considers your net profit (Net Earnings from Self Employment or NESE) and possibly other factors (such as the number of hours you work in a month) in determining your nine-month Trial Work Period and then in applying the $1000 per month Substantial Gainful Activity (SGA) standard. For SGA purposes, SSA looks at your month by month net income although averaging over a period of months is often possible. (Please see my posting of February 17th, 2010 which discusses self-employment in more detail.)

As you can see, self-employment in general and trading specifically can be complicated and is reviewed on a case by case basis by SSA. There may be other related factors involved in your situation that you are unaware, so ultimately discussing the issue with SSA will be needed to get an authorized answer.

I hope this works out so you can pursue your interests in the way you want.

Ben

Trapped in D.C.

Hi Everyone: Hope 2010 has been treating you well so far. I have been taking some down time from the traveling so far this year, except I recently drove to D.C. to spend some time with my sister Quimby and ended up being stranded for a while so I thought I would share a photo memory from that experience. Hope the weather is better where you are! Here’s a question I received recently…

Dear Ben,

I receive SSDI based on my own work history (no SSI.) I’ve started a business making and selling jewelry. This is not a hobby, I plan on selling my jewelry at consignment shops and on my own at craft fairs around the state to make a profit. My question is, how does social security treat my self-employment income in deciding if I’m working substantially each month (above SGA)? Someone told me they just take my entire yearly income and divide by 12; is that right?

Jerry
Goodman, WI

Dear Jerry,

Good question, and one that requires more than a brief and simple answer. Due to the nature of self employment, identifying a self-employed person’s monthly countable income for Substantial Gainful Activity (SGA) purposes can be more complicated than it is for a person who works for wages. For a beneficiary with wages, the Social Security Administration (SSA) contacts the employer who can provide a definite amount an employee earned in any month, but with self-employment SSA depends on the beneficiary’s records of time spent working and earnings which can be irregular and difficult to evaluate exactly.

The basic principal to remember is that in determining countable income for SGA purposes, what matters is when income was earned and not paid: SSA needs to know the value of a beneficiary’s work when it was performed. So the critical factor is not when someone actually receives payment for work but rather when the income was earned.

The method you mentioned is how self employment income is counted for Supplemental Security Income (SSI) purposes: SSA takes the total of the net earnings that an SSI recipient received in a calendar year, divides that by 12, and assigns that same amount of earned income to each month of the year. Even if an SSI recipient has months without self-employment activity or income, all 12 months are used in averaging. However, for SGA, which is the issue you as a Social Security Disability Insurance (SSDI) beneficiary are concerned with, SSA tries to identify when you earned the income.

In comparing the income of a self-employed individual to the SGA monthly earnings guidelines ($1000 in 2010), SSA uses the portion of a self-employed person’s income after the deduction of allowable expenses (which yields Net Earnings from Self Employment or NESE) and the value of certain types of assistance (unpaid help, un-incurred business expenses, IRWE). The final amount then is the countable income which SSA considers the actual value of work performed for SGA purposes.

SSA uses a beneficiary’s own business records and income tax returns to determine the countable income for any particular month of self employment activity. SSA considers each month of self employment activity separately in trying to figure the value of the work performed regardless of the actual income received in the month.

However, if establishing monthly countable earnings is not possible due to the kind of variables that often part of self employment, SSA may have to average the earnings over a period of work. This is similar to the averaging process SSA uses with wages but with an important difference. In averaging wages SSA already knows what the countable income is for each month (from the employer) and from that recognizes that the beneficiary is somewhat over SGA some months and under others; so to support the beneficiary’s work effort, SSA averages those amounts over a representative period to see if the resulting figure is below SGA. On the other hand, with self-employment SSA averages the accumulative income from a representative period in order to arrive at the countable income assigned to each month in the period.

For self employment income averaging, SSA takes a beneficiary’s total countable self employment income from a representative period and divides it by the number of months in that period. A representative period is a period of months in which the person actively engaged in work activity with no significant changes in the work pattern or when there is a no regulatory change in the SGA earnings level, which normally occurs every calendar year (for example, from $980 in 2009 to $1000 in 2010.) SSA averages separately each representative or distinct period of work activity. (POMS DI 10510.012B5)

So if a self-employed beneficiary does not engage in work activity for a month or more, the month(s) could not be included in a representative period for averaging and would end any representative period just before.

In the case of a beneficiary who is self-employed as a sole contractor working on a regular basis and receiving about the same income consistently, averaging to arrive at the monthly countable income probably would not be appropriate. In your case, SSA will analyze the period you were engaged in your jewelry business and see if it is possible to determine from your records when you earned your income. It may be necessary to average your income depending on all the factors involved.

As you can see, it is important for self-employed beneficiaries to maintain accurate, complete, and timely records and to work with SSA to keep them informed of your work status.

Good luck with your business.

Ben