Dave Krawczyk

June 6, 2024

Tax

Retirees and Part-Time Work: Navigating the Tax Complexities

Businesses everywhere face the challenge of finding and retaining valuable employees. To fill these gaps, many employers are turning to retirees. With years of experience, institutional knowledge, and for many a desire to stay busy while earning income, they are an excellent candidate to help bridge the employment gap. Confronted with the offer of highly compensated part-time work, it’s no mystery why many retirees are lured back into the workforce.

Those weighing their options must first understand if they are being offered the ability to continue as a W-2 employee, or if they will be categorized as an “Independent Contractor” commonly referred to as a “1099 employee”. As a 1099 employee, you are technically self-employed, and there are a number of tax implications that come with the status:

  1. Self-Employment Taxes. As traditional W-2 employees, both the employer and the employee split the responsibility for paying Social Security and Medicare taxes, with the employer covering half of the total 15.3% tax burden. However, as self-employed individuals or contractors, you are responsible for the entire 15.3% self-employment tax, which consists of a 12.4% Social Security tax and a 2.9% Medicare tax.

This significant increase in payroll taxes can be a rude awakening for those used to having their employers pay a portion of these costs. These additional taxes must be taken into consideration, as failing to do so could result in a large tax bill come April.

  1. Increased complexity when it comes to tax preparation and filing. As W-2 employees, employers would typically handle tax withholdings and provide them with a straightforward W-2 form at the end of the year. As an independent contractor you are responsible for tracking income and expenses, making quarterly estimated tax payments, and filing a more complex tax return that includes Schedule C (Profit or Loss from Business) and potentially other forms related to self-employment income.

Failing to properly account for and pay estimated taxes throughout the year can result in underpayment penalties and interest charges potentially further diminishing net income from part-time work.

  1. Additional challenges when it comes to deducting business expenses. While employees can typically only deduct a limited number of unreimbursed job-related expenses, independent contractors can deduct a wide range of business expenses which may include home office expenses, transportation costs, and other operational expenses related to their contracting work.

Documentation for these deductions can be strict, requiring detailed records and information. The New York State Department of Taxation and Finance has placed an extra emphasis on auditing itemized deductions and business deductions as of late, so it is critical to understand the rules for deducting these expenses.

  1. Lack of access to employer-sponsored retirement plans, such as 401(k)s or pensions. As independent contractors, retirees are solely responsible if they would like to continue saving into a retirement plan and must explore alternative options, like individual retirement accounts (IRAs) or self-employed retirement plans like SEP-IRAs or i401(k) plans.

While these options provide tax-advantaged ways to continue to build the retirement nest egg, the administrative responsibilities now fall on the self-employed individual. This can be challenging for an individual who has never had to navigate the process of establishing and funding this type of retirement account.

Despite these potential obstacles, returning to work as a contractor can still be a viable and rewarding option for many retirees. However, individuals should educate themselves on the tax implications and seek guidance from qualified tax professionals or a trusted advisor. If this is something you are considering and have questions as to how it might impact your retirement plan, contact a Rockbridge advisor today.

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