sethb[at]panix.com (Seth Breidbart) wrote:
- quote -

My thanks to both Lanny and Seth - I didn't know about the
inflation factor.

--
Vic Roberts
Replace xxx with vdr in e-mail address.

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"MTW" <mtwingcpa[at]yahoo.com> wrote:
- quote -

Right, from an employment agreement, not a deferred comp
agreement; though I suppose it is effectively a non-qualified
dca. They want to put it on a 1099misc, calling it a "prize
or award". Yes, I think I have a "situation". Thanks.

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Victor Roberts <xxx[at]lighting-research.com> wrote:

- quote -

It's likely, if you only count nominal dollars. But they
increase old amounts by inflation and use constant dollars
in the averaging.

So $30,000 35 years ago, which (probably) exceeded the SS
limit, is worth more to the average than $60,000 this year.

Seth

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Fred wrote:

- quote -

My guess is that the payments should be reported on a W-2.
But the REAL issue is whether or not such payments
constitute "wages" for FICA tax purposes (items reported on
a W-2 may or may not meet this qualification).

I am guessing that these payments do NOT come from a
"qualified" retirement plan, but rather are the result of an
employment contract, or from a NON-qualified deferred
compensation arrangement. Whether such payments are subject
to FICA is a complicated question and I would strongly
recommend that you hire a knowledgeable professional to
research this issue for you.

But, as a very rough guess, I'd say that if the amounts in
question had been previously included in your FICA wages as
the entitlement was earned (ie: a deferred compensation
arrangement), then no FICA tax would be payable at the time
the amounts are finally paid to you. However, if that was
not the case, then the payments are ~probably~ subject to
FICA tax when paid.

Note that if the payments are subject to FICA tax, half of
that obligation is the employER's. If the employer is trying
to avoid this obligation by (possibly improperly) reporting
the income on a 1099, then you have a "situation" to deal
with.

MTW

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Victor Roberts <xxx[at]lighting-research.com> wrote:
- quote -

Yes, it is theoretically possible. However, unless the half
pay is based on a very large full pay, that is not likely.
Remember, the earlier year income will be factored up for
inflation.

For example, in my first full year after graduating from
college, I earned a little less than $5,000 and only $4,800
of that was covered for SS. In calculating benefits,
however, that $4,800 would be adjusted upward to the current
level - $92,000 or whatever it is.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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L K Williams <lanny[at]loxinfo.co.th> wrote:
- quote -

Isn't it possible that half the OPs most recent salary is
more than his full salary from 35 or even 30 or 25 years
ago?

--
Vic Roberts
Replace xxx with vdr in e-mail address.

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Alternate B) would be less since there is a maximum earnings
limit for each year ($90k in 2005) the effect on income in
the calculation would be only 1 yr of increased income
($90k) and four years of no income, thus the total
SS-elgible income in B) is less than in A).

All these questions and more can be answered easily by
browsing www.ssa.gov. The FAQ under "Benefits" answers the
basics and has links to more detailed results including the
following.

There is an example calculation spreadsheet at
http://www.socialsecurity.gov/pubs/10070.html that shows how
the 35-yr rule works.

As long as you have SS-elgible earned income (essentially,
wages) the SS taxes are owed.

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- quote -

(A) definately. You are only credited to SS maximum in a
given year, or $94,200 in 2006.

The SSA website has spreadsheet you can type in your annual
income to explore how it changes your pension. Roughly its
takes the monthly average of your best inflation-weighted 35
years of income and plugs into a three-level benefit
formula:

90% * first $600 + 32% * next $3652 + 15% * next $3592 [2006]
The formula designed to give most of minimum wage back, 40%
of median national income, or 25% of double median income
(the ceiling). Then there is an age adjustment minus/plus
[at]7% each year early/late retirement.

http://www.ssa.gov/retire2/AnypiaApplet.html

I've done this calculation and found in my case I cross-over
from the 32% to 15% bracket in 3 years, when paying into SS
becomes less attractive. My SS pension rises $6 per month
for each of the next 40 months I work. Then the increase is
only $3 a month per month of work.

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Fred" <Fred[at]yahoo.com> wrote:
- quote -

I guess I need to clarify my post a bit. Social security
earnings may or may not be your total earnings in any given
year. SS earnings are the amount of wages, etc. covered by
SS; i.e. the amount on which your payroll deduction (or Sch
SE) were calculated. So, the $250,000 would increase the
average but only by the maximum covered wages for the year,
adjusted for inflation.

To increase your benefits, once you retire, or stop working
full time, the current year W-2 must be greater than the
inflation adjusted years included in the 35 highest. If you
have spent your entire working life in an executive,
provessional, or technical field, you probably earned more
than the maximum covered salary every year. Thus, a year at
half pay would not be a higher year and would not have any
effect on your ultimate benefits.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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"L K Williams" <lanny[at]loxinfo.co.th> wrote:
- quote -

I didn't know it worked like that.
For the sake of discussion, would either of these result in
higher SS payments...
A) 35 years at $50,000
B) 30 years at $50,000, 1 year at $250,000, 4 years at $0?

- quote -

Lets say it wasn't early retirement, but normal retirement at
say 67. Would that change matters? Is there an age at which
SS tax doesn't get paid anymore?

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Fred" <Fred[at]yahoo.com> wrote:

- quote -

Well, if you are only getting half pay, these payments are
unlikely to increase your social security benefits. To
calculate the monthly payments, social security adjust your
earnings history (except the latest two years) to reflect
amounts in current dollars, then takes the highest 35 years.
Only if a future year has earnings of more than one of
those years will your benefit be increased.

Either way, IRS is going to say that someone must pay social
security tax. If you take your payment on a W-2, your
employer will pay half; otherwise, you pay the full amount.

Lanny K. Williams, CPA
Nawarat, Williams & Co., Ltd.
Income Tax Services for Expatriate Americans

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I have just taken early retirement. My employer is
obligated to pay me half pay for 5 years. They want to do it
on a 1099misc. Shouldn't it be a W2?

As a practical matter, which am I likely to come out ahead
on, a W2 that subtracts payroll taxes, but which presumably
also increases my ultimate social security, or a 1099misc
which leaves me my money?

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