The USDA Paid Him Rent on 200 Retired Acres. Claiming Social Security Changed the Tax on the Same Check.

Picture a farmer who has spent decades working the same ground. He enrolls 200 acres in the U.S. Department of Agriculture’s Conservation Reserve Program (CRP), which pays him annual rent to take environmentally sensitive land out of agricultural production and maintain conservation cover.

The payment arrives every year. Then he starts receiving Social Security retirement benefits. The land does not change, the CRP contract does not change and the payment can still appear on Schedule F. What changes is one line deeper in the tax return: the same CRP money can stop being subject to self-employment tax.

Social Security Itself Triggers the Exception

Ordinarily, CRP annual rental payments received by an individual are included in net earnings from self-employment and therefore can be subject to the Social Security and Medicare portions of self-employment tax. The IRS provides a specific exception for people receiving Social Security retirement or disability benefits.

If the farmer was receiving those benefits when the CRP payment arrived, the payment remains taxable income and stays on Schedule F. But the IRS instructs him to subtract that amount on Schedule SE when calculating net earnings from self-employment. That distinction is easy to miss. The year before Social Security begins, the CRP payment can contribute to his self-employment-tax calculation. Once he is receiving benefits, the same type of payment can be removed from it. Nothing about the 200 acres had to change. His Social Security status did.

The Earnings Test Changes With It

That tax exception matters for someone who claims Social Security before full retirement age (FRA), which is 67 for someone born in 1960 or later. Before FRA, Social Security can withhold benefits when wages and net earnings from self-employment exceed the annual earnings limit.

Because qualifying CRP payments received while he is receiving Social Security are removed from net earnings on Schedule SE, they do not create the same self-employment earnings that would otherwise feed the retirement earnings test. Social Security uses net self-employment earnings, not every dollar of taxable income, when applying that test. For an early claimant still farming other acreage, that can create an unusual split. His crop profits may continue counting as earnings while the CRP rent from those retired 200 acres does not.

The Payment Is Still Taxable

The exception goes only so far. Removing CRP payments from net self-employment earnings does not make them disappear from the federal income-tax return. The IRS specifically instructs beneficiaries not to remove the payment from Schedule F. That means the income can still affect how much of his Social Security benefit is federally taxable. Depending on filing status and other income, as much as 85% of Social Security benefits can be included in taxable income.

There is another tradeoff. Because the CRP payment has been removed from net earnings from self-employment, it does not add covered earnings to the Social Security record used to calculate future retirement benefits. Schedule SE is one of the mechanisms through which self-employed workers report earnings used by Social Security.

Check the Payment Before Counting It

A farmer nearing a claiming decision should put the CRP contract and Social Security timing on the same page.

1. Confirm that the payment is actually from the Conservation Reserve Program. Other USDA conservation, easement or rental programs do not automatically inherit the CRP exception.
2. Check whether Social Security retirement or disability benefits were being received when the payment arrived. The Schedule SE instructions tie the exclusion to that status at the time of payment.
3. Keep the income-tax and Social Security consequences separate. The payment can remain taxable while disappearing from net self-employment earnings.

For years, the 200 acres can send him the same kind of USDA check. Once Social Security begins, the payment can still be taxable income, but it may no longer be subject to self-employment tax.

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