Social Security benefits are based on your lifetime earnings. When you work and pay Social Security taxes, you earn credits that enable you to qualify for retirement, disability and survivor benefits. Your benefits are calculated using a formula that takes into account your 35 highest-earning years.
Therefore, it’s important to make sure all of your taxable earnings are properly reported to Social Security so you get the full retirement benefit you’re entitled to. Unfortunately, many people don’t realize that they need to report all income, including self-employment, tips, bonuses and investment earnings. Failing to report income can have consequences down the road when you apply for Social Security.
Do you have to report all income to Social Security?
Yes, you must report all of your taxable income to Social Security. This includes:
- Wages from a job
- Net earnings from self-employment
- Tips
- Taxable employee bonuses
- Taxable long-term disability benefits before you reach full retirement age
- Pensions from work not covered by Social Security
- Net rental income and royalties
- Taxable interest and dividends
- Jury duty fees
- Income received as a member of the clergy
- Foreign earned income subject to U.S. income tax
The Internal Revenue Service (IRS) shares information about your earnings with Social Security so your earnings record remains up to date. However, sometimes income doesn’t get reported properly. It’s up to you to confirm your earnings are correct to ensure you receive the maximum benefits.
What happens if you don’t report income?
If you don’t report all of your taxable income to Social Security, it can negatively impact your future benefits in several ways:
1. Lower benefit amount
Your Social Security benefit amount is based on your average lifetime earnings. If income isn’t reported, it can appear that you earned less than you actually did. This causes your benefit amount to be lower than it should be.
For example, if you had $50,000 per year in unreported earnings for 10 years, that would be $500,000 in earnings that Social Security was unaware of. That could reduce your monthly benefit amount by hundreds of dollars.
2. Failure to qualify for benefits
To receive Social Security retirement benefits, you must have earned a minimum number of work credits in your lifetime. In 2023, you need 40 credits (10 years of work) to qualify for retirement benefits. Each $1,670 in earnings gives you one credit, up to the maximum of four credits per year. If income isn’t reported, you may not have enough credits to qualify for any benefits at all.
3. Underestimated future benefits
Every year, Social Security issues statements to workers over age 60 that estimate future retirement, disability and survivor benefits. If your earnings record is missing income, your benefit estimates will be lower than they should be. This can affect your financial planning for retirement.
4. Failure to qualify for disability benefits
To receive Social Security disability benefits, you must meet strict work credit requirements. Under age 24, you need six credits to qualify. Between ages 24 and 31, you need credit for having worked half the time between age 21 and the time you became disabled. At age 31 and above, you need 20 credits in the 10 years immediately before you became disabled. Unreported income means fewer credits, which can prevent qualification for disability benefits.
5. Lower survivor benefits for your spouse and dependents
Your spouse and dependent children may be eligible for Social Security benefits based on your earnings record when you pass away. Just as with retirement benefits, underreported income can mean lower survivor benefits for your family. Ensuring your lifetime earnings are accurate guarantees your family receives the highest benefits possible.
How to report unreported income to Social Security
If you’ve missed reporting income in previous years, you should contact Social Security right away to update your earnings record. Here are some tips:
- Locate your tax records. You’ll need detailed information to report.
- Call Social Security at 1-800-772-1213 to report prior unreported earnings.
- Submit IRS Form W-2, 1099s or tax returns as proof of earnings.
- Correct reporting mistakes as soon as possible to limit future benefit loss.
- Be prepared to pay Social Security and Medicare taxes you should have paid.
The Social Security Administration will update your earnings record with the new income information you provide. It’s important to get this taken care of early because each year you wait makes it harder for them to verify and accurately record unreported earnings.
Penalties for unreported income
By failing to report all taxable income, you’ve essentially underpaid the Social Security and Medicare taxes you owe on that income. In most cases, the SSA won’t impose penalties or prosecute you for unreported income in prior years as long as you voluntarily come forward to fix honest reporting mistakes.
However, the IRS may charge interest and penalties if additional income taxes are owed, and in cases of deliberate fraud. Some potential penalties include:
- 5% per month of unpaid taxes, up to 25% of total tax due
- 20% penalty for substantial underpayment of tax
- $5,000 penalty for filing a fraudulent return
- 75% civil penalty for fraudulent failure to file
- 100% penalty for willfully failing to file return, supply information, or pay tax
- Prosecution for criminal tax evasion
The IRS offers several voluntary disclosure options to taxpayers who want to correct prior mistakes, with reduced penalties. It’s best to consult a tax professional about your specific situation.
How to prevent unreported income in the future
To ensure this issue doesn’t recur in the future, here are some tips:
- Understand what income is taxable. Review IRS rules about taxable income from all sources.
- Carefully report all taxable income on your tax return. Double check your return before filing.
- Review your annual Social Security statements for accuracy. Report any errors you find.
- If self-employed, report all business income on Schedule C and pay self-employment taxes.
- Maintain detailed business records to document income sources.
- Consult a tax professional if you have questions about reporting requirements.
Reporting all income as required lays the foundation for receiving the maximum Social Security benefits you’ve earned over your working life. A little extra diligence now safeguards your financial security in retirement.
Conclusion
Failing to report all taxable income to Social Security can significantly impact your future retirement, disability and survivor benefits. Your benefit amount is directly tied to your average lifetime earnings based on Social Security’s record of your income. Underreporting income means Social Security underestimates your future benefits.
In severe cases, it could prevent you from qualifying for benefits at all. You also may owe back taxes and penalties to the IRS. If you’ve made honest mistakes in the past, promptly contact Social Security and the IRS to fix any reporting issues. Take steps to ensure you report all taxable income going forward so you eventually receive the full Social Security benefits you deserve.
| Income Type | Report to Social Security? |
|---|---|
| Wages | Yes |
| Self-employment income | Yes |
| Tips | Yes |
| Taxable employee bonuses | Yes |
| Pensions | Maybe – report if from job not covered by Social Security |
| 401(k) withdrawals | No – already taxed when earned |
| Rental real estate income | Yes |
| Royalties | Yes |
| Taxable interest | Yes |
| IRA distributions | No – already taxed when earned |
| Prizes/awards | Maybe – report if taxable |
| Scholarships | No – not taxable |
| Alimony | No – not taxable to recipient |
| Child support | No – not taxable |
| Gifts/inheritances | No – not taxable |
| Government benefits | No – not taxable |
| Year | Reported Income | Unreported Income | Total Actual Income |
|---|---|---|---|
| 2018 | $35,000 | $10,000 | $45,000 |
| 2019 | $40,000 | $15,000 | $55,000 |
| 2020 | $50,000 | $0 | $50,000 |
| 2021 | $45,000 | $20,000 | $65,000 |
| 2022 | $60,000 | $5,000 | $65,000 |
| Total | $230,000 | $50,000 | $280,000 |
