U.S. seniors are facing a double whammy. Inflation has eroded their spending power, and this year’s dismal stock market has put a big dent in their nest eggs. The Center for Retirement Research at Boston College calculates total wealth lost from individual retirement accounts and 401(k)s since the beginning of the year at $3.3 trillion.
As a result, many seniors will be tempted to take on side jobs to supplement their primary employment or other source of income. A survey conducted in August by Alignable, a networking platform for small businesses, found that among U.S. residents 62 and older, 51% reported earning $1,000 to $5,000 a month from side jobs, while 16% were earning between $5,100 and $20,000 monthly.
But while an additional job can bring in extra income, many seniors aren’t aware of some common pitfalls that come with this territory, such as the risk of paying more in taxes, or reducing one’s benefits.

If you’ve recently started working for yourself, the first place you are likely to get hit is on taxes. Wage-earnings income needs to be reported to the Internal Revenue Service and Social Security and Medicare taxes withheld. Even if you’re working for someone else, if you have a job where taxes aren’t being withheld, you could get hit with a big surprise at tax time.
Estimated quarterly tax payments are a good place to start. If advance payments aren’t made, the IRS might impose penalties. A good rule of thumb is to set aside 20% to 35% of cash flow in a side account to help offset taxes and other business expenses, tax experts suggest.

Increases in Medicare premiums can be another surprise for seniors who boost their incomes with side jobs.
Monthly premium costs are determined by your income in the tax year two years prior. Thus, if you are now on Medicare or will be in two years, your adjusted gross income this year will be used to determine your Medicare premiums in 2024. And premiums can increase by hundreds of dollars if your annual income rises above certain levels.

For many older Americans, side jobs help put off the day they start collecting Social Security benefits. Benefits paid out increase 8% a year for each year that someone waits past full retirement age, up to age 70.
Some can’t wait, or choose not to wait. It’s possible to start collecting benefits at age 62. You also can continue to work after you start collecting benefits.
However, and this is key: Before you reach full retirement age, and in the year you reach that age, your Social Security benefits can be reduced if your expected income that year exceeds certain levels. In 2022, $1 in benefits is deducted for every $2 you earned above $19,560 in 2020. In the year you reach full retirement age, $1 is deducted for every $3 you earn above $51,960. After you reach full retirement age, however, you get full Social Security benefits no matter how much you earn.

One way to avoid tax surprises and benefit reductions is to open an SEP IRA, or simplified employee pension individual retirement arrangement. These variations on IRAs are used by business owners as retirement-savings vehicles for themselves and their employees.
There is no age limit on when you can set one up. A self-employed individual can contribute 25% of their earned income, maxing out at $58,000 a year. Minimum distributions are required starting April 1 after the calendar year in which you either turn 70½, if you were born before July 1, 1949, or turn 72, if you were born after June 30, 1949.

*Article from wsj.com
*Written by Lori Ioannou

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