Optional Self Employment Tax Method

[RJK0308]

Hello everyone. 

I am working on a return where the client has W2 income and also has their own business for several years. This year their business (schedule C) recorded a loss. In the Pro Connect suggestions, I'm receiving the message, "The taxpayer may benefit by electing the Optional Self-Employment Tax method. Refer to IRS Schedule SE instructions for information regarding benefits that can be derived."

Is anyone familiar with this? If so, are there any benefits and/or consequences of using this method? Are there any other issues to consider?

[abctax55]

You 'get' to pay SE tax on gross income.

So you'd be paying in more to get a larger payout upon retirement.

I've never had a client opt FOR it.

One reason 'might' be if your client needs the extra quarters to qualify for SS benefits?  

[RJK0308]

Thanks for the reply. 

In this situation, their income isn't high this year (only $11,943 W2 and $25,407 AGI). I was reading that they may be able to receive a higher credit for paying into it as well. 

[Babayface1]

This option is mostly used by taxpayers who do not have any SE income on their tax return during the year. They may want to pay minimum SE tax to meet the requirements needed for retirement and disability benefits. There is a minimum of 40 Quarters needed for retirement benefit and 10 quarter for disability benefits.  Your client has W2 wages where SE taxes are already paid. Maybe no need for it.

[BobKamman]

If she has enough FICA tax paid on W-2 income to earn four quarters (about $6,700 for 2023), there is no need to pay more SE tax with the hope that she lives long enough to collect another $5 a year when she retires.  

I had one client, a career federal employee back in the days they did not pay Social Security tax, who needed one more year of Social Security credits in order to qualify for benefits.  Dabbled in real estate; some years she earned a couple commissions, others she did not.  So we used the Optional Method, and at age 70 she started collecting something like $45 a month.  She lived past 90.  At least it paid my fees, and an occasional restaurant meal for the rest of her life.