Due to being an Educator in an affected state for 10 years, I "only" have 29 years of SS Substantial Earnings, meaning I'm subject to a low monthly WEP Penalty if I retire in 2021 until I pass. For this and some other reasons, I'm putting it off until 2022. I want my last year of working in 2021 (before Retirement) to be in a 1099 Independent Contractor-type of Job, specifically as a Courier. Two related questions, please:
* Knowing the 2021 Substantial Earnings amount -- needed to achieve my 30th year to avoid all WEP -- is $26,550, if my 1099 enterprise were to gross, say, $30,000 and then I were to pay the 7.65% combined SS and Medicare tax on the $30,000 ($2,295) through my Income Taxes (Schedule SE and Schedule C) very early in 2022, could I still retire in early 2022 based on my January birthdate?
* For SS purposes, with a 1099 business, which is counted as the required Substantial Earnings that I need ($26,550): (1) the $30,000 gross income; (2) the $27,705 after-tax earnings; or (3) whatever the actual amount would be after taking allowable deductions for gas expenses, vehicle depreciation, and so forth?
The earliest that your 2021 earnings could be counted as a substantial earnings year for purposes of the Windfall Elimination Provision (WEP) is January 2022. In other words, your benefit payment for January 2022 is the first month that your benefit rate could reflect any increase resulting from your 2021 earnings. You don't mention your age, but if you will be at least full retirement age (FRA) by January 2022, you could file your application as late as July 2022 and still claim benefits retroactive to January 2022. However, if you'll still be under FRA in January 2022, you'd need to apply no later than January 31 2022 to be able to claim January 2022 as your initial month of entitlement to benefits.
You couldn't be credited with a substantial earnings year based on your 2021 self-employment earnings until you file your tax return for that year and pay the appropriate taxes. If you file for your benefits effective with January 2022 and if your tax return hasn't yet been filed when you apply, your benefit rate could be recalculated to give you credit for your 2021 earnings after your tax return is filed. Any resulting increase in your benefit rate would then be retroactive to your benefit payment for the month of January 2022.
Just to clarify, any reduction in your benefit rate resulting from WEP is subject to being reduced or removed if you have additional years of substantial earnings after your initial month of eligibility for benefits. So, for example, if you started drawing your benefits in 2021 with 29 substantial earnings years, your benefit rate could be recalculated to remove the WEP reduction effective with your benefit payment for January 2022 if your earnings in 2021 are at or above the amount considered as substantial earnings.
The countable earnings amount for self-employment earnings is your net earnings from self-employment (NESE). Your NESE is the amount on which you pay self-employment tax, and it's calculated on Schedule SE of your tax return. Your countable NESE is basically 92.35% of the net profit from your trade or business. Thus, if your net profit after deducting your business related expenses in 2021 was $30,000, your countable NESE would be $27,705.
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