Al­lo­cat­ing Small Busi­ness In­come


Dear Rusty: My wife and I own a small com­pany, so we can al­lo­cate our pay as we wish. She had not paid into So­cial Se­cu­rity in her ca­reer so six years ago her pay was in­creased so she paid more into So­cial Se­cu­rity, and me less. My yearly So­cial Se­cu­rity state­ment showed I went from about $3200 in es­ti­mated ben­e­fits per month to about $2800. We plan to work about an­other five years, so how should we al­lo­cate our pay? And can you rec­om­mend a re­source for us to get more in depth un­der­stand­ing of how So­cial Se­cu­rity works? Signed: Small Busi­ness Owner

Dear Small Busi­ness Owner:

The rea­son your ben­e­fit es­ti­mate went down is that when es­ti­mates are done be­fore you’ve reached your full re­tire­ment age (FRA), they as­sume that you will con­tinue earn­ing at your most re­cent level un­til you reach your FRA. So, when you re­duced your an­nual earn­ings it also re­duced your es­ti­mated So­cial Se­cu­rity ben­e­fits. By rais­ing your wife’s earn­ings, she has now been ac­cu­mu­lat­ing “quar­ter cred­its”; six years of work equals 24 quar­ter cred­its for your wife, but she needs 40 to claim ben­e­fits on her own work record. The ques­tion you should ask your­self is this: Will any ben­e­fit your wife gets from her own work record be greater than half of your ben­e­fit at full re­tire­ment age? (FRA is 66 plus two months for you and 66 plus four months for your wife.) Your wife’s ben­e­fit af­ter she ac­cu­mu­lates the 40 cred­its will pre­sum­ably be small in com­par­i­son to yours. And even if she gets a small ben­e­fit on her own record, as your spouse at her full re­tire­ment age she’ll be en­ti­tled to half of the ben­e­fit you were en­ti­tled to at your full re­tire­ment age (you must be al­ready col­lect­ing). Let’s use an ex­am­ple:

• If you con­tinue to al­lo­cate earn­ings to your wife for an­other four years she will be el­i­gi­ble for a small “re­tire­ment” ben­e­fit based upon her own min­i­mum earn­ings record.

• When you start col­lect­ing your own ben­e­fit your wife’s spousal ben­e­fit amount will be half of yours if she takes it at her FRA (re­duced if she takes it sooner).

• Your wife’s to­tal ben­e­fit (her own and her spousal ben­e­fit) will at max­i­mum be half of yours; so even if she has a small ben­e­fit on her own she’ll still get only up to her spousal ben­e­fit amount which will (pre­sum­ably) be con­sid­er­ably higher than her own.

• If you al­lo­cate more/most of your busi­ness earn­ings as pay­roll to your­self, you will be in­creas­ing your own ben­e­fit, but you will also be in­creas­ing your wife’s spousal ben­e­fit be­cause she will get half of what­ever your FRA ben­e­fit is, re­gard­less of what her own ben­e­fit is (un­less her own ben­e­fit would be more than half of yours).

Keep in mind that only your earn­ings up to So­cial Se­cu­rity’s “pay­roll tax cap” count. That is $128,400 for this year (changes an­nu­ally), so you re­ally don’t need to al­lo­cate any more than that to your­self to im­prove your own ben­e­fit. If your busi­ness earn­ings are more than that you can al­lo­cate any ex­cess to your wife, so she can earn more quar­ter cred­its be­cause any ex­cess won’t be oth­er­wise used to im­prove your SS ben­e­fit. But un­less her es­ti­mated ben­e­fit ex­ceeds half of yours she will still only get half of yours. While I can’t make the de­ci­sion for you, I hope this gives you enough in­for­ma­tion to make the right choice on how to al­lo­cate your com­pany’s earn­ings as pay­roll.

You asked for a re­source to get a more in-depth un­der­stand­ing of So­cial Se­cu­rity, and I rec­om­mend that you try our AMAC Foun­da­tion So­cial Se­cu­rity web­site for all of the lat­est in­for­ma­tion about the com­plex topic of So­cial Se­cu­rity. You might want to pe­ruse the Q&A sec­tion, which con­tains nu­mer­ous ar­ti­cles I have writ­ten about So­cial Se­cu­rity matters, in­clud­ing much more depth on Spousal Ben­e­fits.

The in­for­ma­tion pre­sented in this ar­ti­cle is in­tended for gen­eral in­for­ma­tion pur­poses only. The opin­ions and in­ter­pre­ta­tions ex­pressed in this ar­ti­cle are the view­points of the As­so­ci­a­tion of Ma­ture Amer­i­can Cit­i­zens Foun­da­tion’s So­cial Se­cu­rity Ad­vi­sory staff. To sub­mit a ques­tion, con­tact the Foun­da­tion at info@amac­foun­da­

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