At 66, how much is continued earned income helping my Social Security?

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Allan
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At 66, how much is continued earned income helping my Social Security?

Post by Allan » Sun Mar 19, 2017 7:54 am

I am 66, have a fairly strong earnings record towards the 35 years counted by Social Security. I own my company and I always pay the maximum in Soc Sec taxes and I expect this to continue. I have no desire to retire, will probably keep my company active as long as I can. I am delaying Soc Sec until age 70 (I do receive ½ of my wife’s Soc Sec), and I am currently forecast to receive $3,390 in benefits at age 70.

My question is I noticed that for 2017 I now pay Soc Sec tax on $127,200 of earnings, since I am self-employed (S-Corp) I pay both sides although I guess one side is deductible for my company. For the amount of SS taxes I am now paying annually, how much will this increase my actual benefits at age 70 or how do I calculate this. It appears the $12,000 or so that I am paying each year will net me very little in actual monthly SS benefits and I just don’t see any way around this if I want to continue working (which I do).

I had one idea, trying to figure out if it is viable. My company is an S-Corp, but I also have a small company that is a C-Corp that has a small annual revenue (less than $50,000). If I were to do all of my business in the C-Corp (which I could do) even though I know has double taxation aspects to it and not draw a salary (pay no SS). Could I let the earnings build up in the C-Corp and distribute later in a tax efficient manner or let earnings accumulate for the benefit of my estate or a combination of the two.

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grabiner
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Re: At 66, how much is continued earned income helping my Social Security?

Post by grabiner » Sun Mar 19, 2017 8:16 am

Your SS benefit is based on your 35 highest-earning years, indexed to the average wage before age 60, but not reduced for years after age 60. Thus, if you pay the maximum SS tax in 2017, this will replace your 35th-highest year, and it should increase your benefit since you are replacing a year indexed to 2011 wages with an unindexed year. For example, if you earned the maximum $106,800 in 2011 and that is your 35th-highest year, you would replace this with $127.200 for 2017.

Since you are over the second bend point, your Primary Insurance Amount is increased by 15% of the average indexed monthly earnings, which is .15/(35/12)=1/2800 of the wage change. Since you take SS at age 70, you will get 132% of the AIME every month, which is 1/2121 of the annual wage change. For replacing $106.800 with $127,200, you will get an extra $10 per month; if the year replaced is lower, you may get $20 rather than $10.

You'll have to check with your accountant and tax advisor whether you can structure your compensation as indicated, and whether it is worthwhile given the other taxation issues. I believe the IRS objects to corporations not paying a fair salary to their employees in order to avoid payroll taxes, but this is a matter for your tax advisor.
David Grabiner

Traveler
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Re: At 66, how much is continued earned income helping my Social Security?

Post by Traveler » Sun Mar 19, 2017 8:31 am

I don't know the answer to your question, but was disappointed to hear last year that the FICA income limit was going from $118,500 to $127,200. [OT comment removed by admin LadyGeek]

Scotttheking
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Re: At 66, how much is continued earned income helping my Social Security?

Post by Scotttheking » Sun Mar 19, 2017 9:12 am

Traveler wrote:I don't know the answer to your question, but was disappointed to hear last year that the FICA income limit was going from $118,500 to $127,200. [OT comment removed by admin LadyGeek]


It's indexed to average wages. See https://www.ssa.gov/policy/docs/policyb ... 11-02.html for more information.

22twain
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Re: At 66, how much is continued earned income helping my Social Security?

Post by 22twain » Sun Mar 19, 2017 10:36 am

Traveler wrote:was disappointed to hear last year that the FICA income limit was going from $118,500 to $127,200. [OT comment removed by admin LadyGeek]


We had a long thread about this a couple of weeks ago:

viewtopic.php?f=2&t=212384

Bottom line: the increase was larger than usual this year because there was no increase last year, which in turn happened because of a special-case restriction. It would have ended up at $127,200 this year even if there had been a "normal" increase last year. So you actually got a break, overall!

tibbitts
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Re: At 66, how much is continued earned income helping my Social Security?

Post by tibbitts » Sun Mar 19, 2017 10:56 am

The OP isn't asking about his potential SS benefit increase. He already knows it's essentially nothing.

He's asking to what extent he can pay himself through non-SS taxable methods (dividends, benefits that wouldn't be taxable, etc.) I'm not an expert but I believe that regardless of the entity conduit he chooses (C-corp, etc.) he has to pay himself a "reasonable" wage. Others with more experience can clarify that, but that's the issue. The SS benefit issue has already been put to bed; it's the SS (and medicare) tax issue that remains.

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Re: At 66, how much is continued earned income helping my Social Security?

Post by smitcat » Sun Mar 19, 2017 12:07 pm

"My question is I noticed that for 2017 I now pay Soc Sec tax on $127,200 of earnings, since I am self-employed (S-Corp) I pay both sides although I guess one side is deductible for my company. For the amount of SS taxes I am now paying annually, how much will this increase my actual benefits at age 70 or how do I calculate this. It appears the $12,000 or so that I am paying each year will net me very little in actual monthly SS benefits and I just don’t see any way around this if I want to continue working (which I do)."

Absolutely true- you can find the detailed online calculator on the SS site which will allow you to place figures in for each years earning to make direct comparisons of 'what ifs' for the future. We did this for ourselves and learned that the differences in adding salary above the second bend point (and even the first) was very small- maybe $20-30 monthly over 5 years if your salary was halved.
Then you can compare the lower salary with the lower deductions (SS/FICA/etc) on both sides to this calculation. Taking these to our accountant we determined the best route for us a few years ago was a lower salary with the 'possibility' of higher company profits. So you will lose the slight write-off of paying those taxes but gain the money o potentially invest.
Summary - once you have many base years of SS (30 or so) at or near the second bend point added salary at or above that number do not supply a larger gain in SS benefits when you are ready to collect them.
The SS gov site has the detailed calculator that you can play with and print your personal results for your own comparison.

tibbitts
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Re: At 66, how much is continued earned income helping my Social Security?

Post by tibbitts » Sun Mar 19, 2017 1:12 pm

So again, the OP is asking what he can get by with and be able to defend in an audit. I think the experts here (not me!) will need more details on the nature of the business and the dollars involved to answer that question.

Allan
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Re: At 66, how much is continued earned income helping my Social Security?

Post by Allan » Sun Mar 19, 2017 1:24 pm

I am careful to fulfill the "reasonable salary" requirement, I always run this by CPA. But I am still paying max Soc Sec and based on my age and prior year contributions it seems the payback in benefits is going to be minimal, especially since I pay both sides (employee & employer).

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dwickenh
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Re: At 66, how much is continued earned income helping my Social Security?

Post by dwickenh » Sun Mar 19, 2017 1:40 pm

Please note that SS is insurance, not a savings account. The additional money you are paying SS until you quit working will go into the pool to pay out benefits to all SS recipients. I for one would like to thank you, although I am not receiving benefits yet and am waiting until 65-66 for benefits.

Best wishes to you,

Dan
The market is the most efficient mechanism anywhere in the world for transferring wealth from impatient people to patient people.” | — Warren Buffett

tibbitts
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Re: At 66, how much is continued earned income helping my Social Security?

Post by tibbitts » Sun Mar 19, 2017 2:09 pm

Allan wrote:I am careful to fulfill the "reasonable salary" requirement, I always run this by CPA. But I am still paying max Soc Sec and based on my age and prior year contributions it seems the payback in benefits is going to be minimal, especially since I pay both sides (employee & employer).

Right, the payback is next to nothing, we're all agreed on that including you. So the only thing you can expect to learn is:

1. a new definition of "reasonable", lower than your cpa is advocating. Clearly this is a judgement call. I'm not sure how "Bogleheads told me to do it" would hold up in an audit.

2. some other accounting technique that will let you earn just as much money without paying as much in SS taxes. See cautionary note above.

smitcat
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Re: At 66, how much is continued earned income helping my Social Security?

Post by smitcat » Sun Mar 19, 2017 4:04 pm

"So again, the OP is asking what he can get by with and be able to defend in an audit. I think the experts here (not me!) will need more details on the nature of the business and the dollars involved to answer that question."

It is a very interesting subject for those of us that have reviewed numerous business's for sale and have observed owners salaries and the total company profits. The thought of having a good CPA help in that decision is very good as well as the entire business description and outlook. Asking more than one CPA over time might be helpful as well. There is no way I would advise anyone what the correct approach would be but the likelihood of audit and the subsequent likelihood of problems with these 'general rules' is very remote.

Allan
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Re: At 66, how much is continued earned income helping my Social Security?

Post by Allan » Sun Mar 19, 2017 5:28 pm

tibbitts wrote:
Allan wrote:I am careful to fulfill the "reasonable salary" requirement, I always run this by CPA. But I am still paying max Soc Sec and based on my age and prior year contributions it seems the payback in benefits is going to be minimal, especially since I pay both sides (employee & employer).

Right, the payback is next to nothing, we're all agreed on that including you. So the only thing you can expect to learn is:

1. a new definition of "reasonable", lower than your cpa is advocating. Clearly this is a judgement call. I'm not sure how "Bogleheads told me to do it" would hold up in an audit.

2. some other accounting technique that will let you earn just as much money without paying as much in SS taxes. See cautionary note above.


I am pretty conservative when it comes to the IRS, but I will further research your #1 suggestion with my CPA. There seem's to be no clear guidelines as to what is a "reasonable salary". As to your #2 suggestion, I've crunched numbers every which way, there is some nimbling around the edges but nothing substantial I can find to convert earned income to benefits or distributions. The search will continue.

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Re: At 66, how much is continued earned income helping my Social Security?

Post by Spirit Rider » Sun Mar 19, 2017 6:51 pm

While you are right that there are no specific guidelines on what is a "reasonable salary", there are very clear court rulings on what is an unreasonable salary and how to calculate a reasonable salary. The court rulings in the last five years have largely followed IRS Fact Sheet FS-2008-25.

Of the nine factors, the courts have emphasized that a competitive salary for someone doing your job with your knowledge skills and experience at comparative businesses is the starting point. Then this can be adjusted by the unique circumstances of your business based on the other eight factors.

For example, if the majority of the business revenues come from services provided by the shareholder-employee(s), then the majority of net business income should be paid in compensation to shareholder-employee(s). If the majority of the revenue comes from the services of other employees or from capital and/or equipment, then the compensation paid to the S-Corp shareholder-employee(s) can be lower.

My experience is that CPAs seldom have S-Corp owners taking too high a salary. My experience is just the opposite. They tend to be aggressive. Also, in 2017 any salary below $144K reduces the amount of any employer retirement plan contribution to a Solo 401K.

Finally, there are very few circumstances where it makes tax sense to use a C-Corp for the revenue for an individual's business. Usually this choice is dictated by capital needs of the business, not taxation.

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