Speaking of write-offs: more drama from sister

[Scanner]

Well, I need the accountants advice here. My parents came across one of those little green SSI statements we all get at the end of the year.

For 2002, 2003, and 2004 it showed $0 for income for SSI and Medicare.

I am trying to figure out how this could be. She does work as an independent contractor with expenses and all that. She is a drifiter, a bit flighty and does not really hold down a steady job. I mean she lived in California for 10 years and we are from the East Coast. We all know people in California are a bit liberal and squirrely.

And to not be judgemental, she has a sizable savings account and a little retirement money invested and no debt.

From what I know, the only way you get to declare $0 is three ways:

1. She failed to file a return those years. I seem to recall she does Turbo Tax herself because she's so cheap/frugal. But maybe because she thought she didn't make money, she didn't file. I wouldn't put it past her.

2. She had a loss for 3 years. However, I am not sure how the IRS, if she gets flagged, would view having a loss for 3 years. I thought they then view the business as a hobby.

3. She's a sub-chapter S corp where you get to file income as dividends. I really doubt this as it usually costs $500 to file for this and I just can't my sister spending money to do this. She hates to pay professionals of all kinds - accountants, lawyers, and doctors.

I am worried she's going to hit with back taxes, penalties, and worst of all - fines. I've messed up on a couple of state income taxes in the past and paid penalties (like $12 or something). Penalties aren't what ruin you - it's the fines. They'll ruin you.

Any theories on this?

I dread approaching her.

[scfr]

Scanner - Suck it up and approach her. Good luck.

[Staceyy]

I worked as an independent contractor for years and many times I was given the option of being paid w-2 and having taxes taken out or receiving a 1099 where no taxes were taken out and I was responsible for paying my own taxes. The choice was mine. This is legal.

Here is a discussion of social security and medicare payments for sub-chapter S corps. http://www.vangorpcpa.com/SUB%20S%20INFORMATION.htm


You said she failed to file a return for 2 years. Did she tell you this or do you assume she did not because no social security or medicare taxes are showing on her social security statement? Is it possible those years she did not earn enough to file? She may have filed but not paid herself a salary. I have not read any previous posts regarding your sister. It sounds from what you're saying here that she is financially frugal and responsible.
If she has a sizable bank account and retirement account why are you worried? It sounds like she could pay any back taxes and penalties.

[sweeps]

It's legal to receive a 1099 without taxes taken out, but you still have to report it to the IRS, which is where the SSA goes to get its information.

[Scanner]

Yeah, the question in my mind is not how she was paid. It's more what she filed.

When I send in my quarterly payments, that's just kind of "credit applied" to when I file my tax return.

Maybe she lived off of savings for 3 years - it's possible. But I would think she would have at least some income from interest on savings. I don't know how you get away with declaring $0 for 3 years.

[sweeps]

But interest income doesn't count as earned income which is what SSA will be looking for.

[mom-from-missouri]

As a contractor she may be considered self employeed, and has not paid into SS.

[Scanner]

Mom,

I think it's actually the opposite - when you are self-employed, you pay double SSI. You don't get the employer match.

[gackle]

My parents came across one of those little green SSI statements we all get at the end of the year.

I dread approaching her.

I'm not sure why you're even considering approaching her. From what I can tell, your parents found this. It sounds like your sister is an adult and she has not approached you asking for help. This is her problem, if it is even a problem at all.

Here's what I see happening: There is some explanation for what happened that we didn't think of and now she is resentful that you intefered with her personal finances. I've learned from my instances of "foot in mouth" disease more times than I care to. Most people usually have some kind of good explanation as to why they did something.

I could be wrong: I don't know your sister and all the facts behind your situation. But this is my perception from what you have told us. Best of luck to you.

[mom-from-missouri]

Mom,

I think it's actually the opposite - when you are self-employed, you pay double SSI. You don't get the employer match.

NO. if you are self emp and take a salary, you may pay into SS. If you take a draw, you dont.

What did she do for a living?? Some jobs don't pay into it at all--such as railroad employees and other self funded employeers. Also depending on the crop and type of year-farmers, orchards, vineyards and their employees.

When I had my daycare, the small business administration recommended I pay into it if I had no other source of income. But, I also worked nights for a major telecommunications company with full benefits and paid into it there. So, they instructed me NOT to pay into SS at the daycare--plus, some months I did not even get a salary for the first year or so. However I did have to pay state and federal taxes.

Self employeed people often do pay a self employment tax however. But, that is not SS.

[moneybags]

Self employeed people often do pay a self employment tax however. But, that is not SS.

That is social security. There is not a tax imposed on self employed persons that the rest of us don't pay also. Since they are the employee & the employer, they have to pay both portions (the self employment label is the "employer" portion). If you are not self-employed, your employer pays half and you pay the other half.

[zetta]

It's also possible that when she filed her income taxes, she didn't answer some questions right in TurboTax and so didn't file the right forms to pay into social security.

[MonkeyMama]

YEah - about #1 - #3 is it, and neither is good.

She may have inadvertently misfiled her tax return. But if she had any profits she should filed a schedule C and paid SE tax (Which is the FICA/MC stuff - both hers and the match). Maybe she didn't file it correctly?

You are right on the 3 years of losses. IF it was she would most certainly be audited. That is the one given we see with the IRS. I Am not sure we really see audits for much else here, but every client we have had with 3 years losses has been audited.

If she is an S Corp you can take dividends instead of salary, but not taking in salary is a big red flag. The only excuse not to take salary is years of losses, which is an sudit red flag in itself. Lose-lose.

Doesn't sound good... I would talk to her because it is better to make it right now then wait for the IRS to come knocking.