Many retirees, as well as some people on disability, supplement their government benefit by selling items on eBay and other online venues. How do your online sales affect these benefits?
Casual sellers versus business owners
Those who are casual sellers and only post a few items a year on eBay probably are not impacted by this activity. While income, even from these sales, must be reported, likely it is not enough to make any impact on government benefits. There may not even be any income to report if sales involve used items and do not generate profits.
Those in business, however, have some key issues to be concerned about:
- Whether the income will adversely affect government benefits;
- Whether the tax cost on benefits is high compared to the income received.
There is no magic formula for determining whether eBay activities are a business. Those who devote a great deal of time and effort to selling on eBay may be in business. However, if transactions are more than 200 and total more than $20,000, PayPal and other payment processors are required to report the transactions to the IRS; this could certainly make the government think you're in business.
Impact on government benefits
Retirees. If you retire on Social Security benefits before age 66 (the early retirement age is 62), your benefits are reduced if your earnings from a job or self-employment exceed $14,160 in 2011 (this income limit is adjusted annually for inflation). This works out to $1,180 per month. You lose one dollar in benefits for each two dollars in earnings over the limit. You have to be in business and be profitable in order to have earnings from self-employment. Earnings from investments or casual sales on eBay do not count against you for this purpose.
Those who are at full retirement age (66 or older) can earn any amount from a job or self-employment without any loss in benefits.
Disabled individuals. Social Security disability is only for those who have a substantial impairment that prevents them from working. Once on disability, a person can test his or her ability to work without losing benefits. There are Social Security's work incentives and Ticket to Work programs. For instance, under the work incentives program, a disabled person can do trial work for up to nine months without loss of benefits. However, once earnings become substantial, disability benefits can be lost. Rules for this can be found in SSA Publication No. 05-10095.
Veterans benefits. Different rules apply to veterans benefits for disability. Because veterans have different levels of disability, all those other than vets who are 100% disabled can work while still collecting benefits. For more information, check the VA website.
Taxation of benefits
Social Security benefits, whether paid to retirees or those who are disabled, may be tax free, or included in income at 50% or 85%. Earnings from eBay can impact the taxation of these benefits - the more you earn on eBay, the more your benefits could be taxed. Benefits become taxable when your income (including any eBay earnings), plus tax-exempt interest and one-half of Social Security benefits exceed $25,000 if single, or $32,000 if married filing jointly.
The taxation of Social Security benefits is explained in IRS Publication 915.
Note: Even if your state has an income tax, it may not tax Social Security benefits. Check with your state revenue or finance department.
Veterans benefits paid for disability generally are tax free. This tax rule is not impacted by any earnings on eBay.
If you are receiving government benefits and are concerned about the impact of your eBay activities on these benefits, talk with an expert to clarify your situation so you can sleep well at night!