Financial Intel Monthly

Generating a Self-Employment Loss

Aug 1, 2020 7:09:00 AM / by The Retirement Group (800) 900-5867

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What Is It?

If you're self-employed (including if you operate your business as a sole proprietorship) and expect to have annual earnings in excess of the Social Security retirement test exempt amount, you might be able to generate a self-employment loss that will offset your excess earnings in order to prevent any reduction of your Social Security retirement benefits.

How Does It Work?

Determine Your Earnings for a Taxable Year

Under the retirement earnings test, the Social Security Administration (SSA) defines earnings for a taxable year as the sum of all wages for services performed in the year, plus all net earnings from self-employment for the year minus any net loss from self-employment for the year. Your wages for services performed in the year are your earnings from an employer. You’re net earnings and net loss from self-employment are the same as reported on your federal income tax return.

Example(s): After she retired, Stella worked part-time in a school cafeteria. She also ran two businesses out of her house: a laundry service and a bookkeeping service. Last year, she earned $5,000 in wages from the school, had $1,500 in net earnings from her laundry service, and had a net loss of $700 from her bookkeeping service. So, for the purposes of the retirement earnings test, Stella's earnings were calculated this way:

Wages from school


Laundry service




Loss from bookkeeping service

  - $700





Determine Net Profit and Net Loss

You report both your business income and deductible business expenses on Schedule C (IRS Form 1040), Profit or Loss from Business (Sole Proprietorship). Your business income is the money you received for doing business that year. Deductible business expenses are the ordinary and necessary costs of doing business, such as management expenses, labor, supplies, advertising, insurance premiums, and travel expenses, among others. If your business income outweighs your deductible business expenses, you have a net profit. If your deductible business expenses outweigh your business income, you have a net loss. (However, if an activity consistently generates net losses, the IRS may recharacterize the activity as a hobby, rather than as a trade or business, and limit your ability to deduct net losses from the activity.)

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Generate a Self-Employment Loss

You can generate a self-employment loss that will reduce your excess self-employment earnings in two ways:

  • Generate a business deduction that will eliminate any excess earnings.

Example(s): Edna is a self-employed graphic artist. After she retires at age 63, she has revenues of $20,000 from doing freelance work. Normally, this would result in part of her retirement benefits being withheld, since her revenues exceed the retirement earnings test exempt amount for that year. However, that same year, Edna also spent $7,000 upgrading the computers she uses in her business. When she files her income tax return for that year, she can deduct the cost of the computer equipment from her earned income from her graphic arts business, reducing her net earnings from self-employment to $13,000, under the Social Security earnings limit for that year.

  • Balance out your wages from an employer or your net earnings from self-employment from one job with a net loss from another trade or business.

Example(s): Len, age 63, works part-time as an auto mechanic at a local garage, and he also owns his own welding business. In one calendar year, he earns $840 more than the retirement earnings test exempt amount. After Len fills out Schedule C, he realizes that he has a net loss from his welding business that reduces his net earnings from self-employment to an amount below the Social Security earnings limit.

Even though Len's earnings from an employer is over the Social Security earnings limit, Len's Social Security retirement benefit is not reduced because his net loss from self-employment income offsets a portion of his wage income.

Tax Considerations

Whether or not you can generate a self-employment loss will depend upon your business income and expenses. You may want to consult a tax professional for more advice on how to postpone or accelerate income and how to maximize your business deductions.



This material was prepared by Broadridge Investor Communication Solutions, Inc., and does not necessarily represent the views of The Retirement Group or FSC Financial Corp. This information should not be construed as investment advice. Neither the named Representatives nor Broker/Dealer gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. The publisher is not engaged in rendering legal, accounting or other professional services. If other expert assistance is needed, the reader is advised to engage the services of a competent professional. Please consult your Financial Advisor for further information or call 800-900-5867.


The Retirement Group is not affiliated with nor endorsed by,,,,, ING Retirement, AT&T, Qwest, Chevron, Hughes, Northrop Grumman, Raytheon, ExxonMobil, Glaxosmithkline, Merck, Pfizer, Verizon, Bank of America, Alcatel-Lucent or by your employer. We are an independent financial advisory group that specializes in transition planning and lump sum distribution. Please call our office at 800-900-5867 if you have additional questions or need help in the retirement planning process.


The Retirement Group is a Registered Investment Advisor not affiliated with FSC Securities and may be reached at

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