Most of us work for wages, and there isn't much we can do to avoid paying Social Security taxes on those earnings. But people who are self-employed can frequently "cook the books" to lessen their tax burden. (By the way, I totally understand that when self-employed people do pay Social Security taxes, they pay twice the rate of the rest of us. That's a topic for another column.) But today, I'm going to answer emails from readers who avoided paying Social Security taxes and are now suffering the consequences.
Q: My husband and I are self-employed. Quite a few years ago, we incorporated our business. We did this on the advice of our accountant who said we would pay less in taxes this way. In fact, for many years we paid no taxes at all. Recently, at age 58, I hurt my neck and back in a car accident. I filed for Social Security disability benefits and my claim was denied. They said I'm not insured. What does that mean? I have my 40 quarters from work I did before we started this business.
A: It means there are consequences to not paying taxes. There are two insured status requirements you must meet to get Social Security disability benefits. The first is that you must have at least 40 Social Security credits, often called quarters. You said you have that, which means you will get retirement benefits someday.
But the second half of the insured status rule for disability says you must have been working and paying Social Security taxes in recent years. Specifically, the law says that you need to have paid Social Security taxes in five of the last 10 years.
I just hope that you took some of that money you saved by not paying Social Security taxes and bought yourself a good disability insurance policy!
Q: My ex-husband and I had a small but successful bookstore for many years before we divorced. All the earnings from that business went on his Social Security record even though I did all the bookkeeping and payroll and other office duties. My ex is 61, but I am almost 65. I checked with Social Security and learned I am due nothing! And I'm sure my ex will one day get a big fat Social Security check. I think Social Security is cheating me. I plan to go back and refile our taxes.
A: Social Security isn't cheating you. Your ex-husband cheated you. Or possibly, you cheated yourself.
You said you did all the bookkeeping for the business. If that included the filing of tax returns, you should have done a better job of it. Or if someone did your taxes for you, you should have been asking some questions way back then.
The part of the tax return that assigns self-employment income for Social Security purposes is called the Schedule SE. What likely happened is that just one Schedule SE was completed annually, and that form had your husband's name and Social Security number on it. So all the income went on his Social Security record. But based on what you said, the income from the business should have been divided. There should have been two Schedule SE's prepared: one with his name and SSN and one with yours.
You might as well give up your plan to go back and file amended tax returns. To do so would require not only a lot of time and effort, but also would need your ex-husband's cooperation. And I'm sure that is never going to happen.
The only good news I can give you is that once your ex-husband reaches age 62, you will be eligible for divorced wife's benefits on his Social Security account. (He does not have to be getting Social Security himself.) You would get an amount equal to one-half of his full Social Security benefit rate.
And if he dies before you do, then you will get 100% of his Social Security in the form of divorced widow's benefits.
Q: My wife and I own a dry cleaning business. I am about to turn 62 and want to start my Social Security. So we plan to put the business in my wife's name. I will draw a small salary — about $18,000, just enough to stay under the Social Security earnings limit. The rest of the business income will go under my wife's name to help build up her Social Security account. Is my plan going to work?
A: Even though you are "cooking the books," the Social Security Administration, or SSA, recently made a big policy change that's going to help you — and thousands of other self-employed business owners — qualify for Social Security retirement benefits.
The original philosophy behind Social Security was that you had to be retired to be eligible for Social Security retirement benefits. And retired initially meant not working — period. But over the years, Congress liberalized these rules. Currently, they say if you are over your full retirement age, or FRA, you can get your Social Security benefits even if you are still working full time. And if you are under FRA, you can get reduced monthly benefits if your earnings are below a certain limit. That earnings limit is $18,960 in 2021. In the year you reach FRA, the limit goes up to $50,520.
If someone works for wages, it's very easy to document if that person has income under the earnings limit — a simple check of his or her pay stubs or W-2 form shows exactly what he or she is making.
But it's a different story for people who run their own business. They are able to fudge things a bit, as you plan to do. For decades, the SSA required business owners under FRA who were signing up for Social Security benefits to jump through quite a few more hoops than simply filling out a retirement application. They had to complete extensive questionnaires that delved into the day-to-day operations of their business. They had to provide documentation that they were cutting back on their involvement in the business. In effect, they had to prove they were retired — or at least significantly reducing the amount of time they spent in the business.
But all that has changed. After years and years of doing such development, the government has decided it's not worth the hassle. The number of staff and the administrative hours spent investigating these cases simply didn't justify the money saved by not paying Social Security benefits to those few business owners who were caught trying to cheat the system.
So, you are going to be able to collect Social Security retirement benefits even though you technically are not retired from your business.
If you have a Social Security question, Tom Margenau has a book with all the answers. It's called "Social Security: Simple and Smart." You can find the book at creators.com/books. Or look for it on Amazon or other book outlets. To find out more about Tom Margenau and to read past columns and see features from other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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