To maximize Social Security benefits as a business owner, consider paying yourself a low salary to reduce Social Security and Medicare taxes, especially if you’re close to retirement and married. Social Security calculates benefits based on your highest 35 years of earnings. If married for over ten years, spouses can receive 50% of the higher-earning spouse’s benefit at retirement age. This strategy is illustrated with a couple owning a family business where they adjusted their salaries to boost the lower-earning spouse’s eventual benefit. By examining their historical earnings, they were able to increase their Social Security benefits effectively.
A common question we’ve seen with our clients that own businesses is what are some efficient strategies to maximize Social Security benefits with how you take your income out of the business? So Matt, what are some things that you could consider as a business owner to make sure you’re getting everything you can out of Social Security?
Yeah, absolutely. So some business owners will purposely pay themselves a low salary to avoid Social Security tax or avoid Medicare tax if they’re an S corporation. Depending on how close you are to retirement and depending on your marital status.
One recent case that we looked at, the husband’s Social Security at the normal retirement age of 67 was posed to be about $3,000 a month. And the wife’s normal retirement age at 67 they were both the same age, was $1,000 a month.
Now this was a family owned business where both the husband and the wife had ownership in the business. And so Social Security looks at the last 35 years or the highest 35 years of your earnings career.
That’s fact number one. Fact number two is that if you are married for more than ten years, in this case this was the case spouse is eligible for either their own benefit or 50% of their spouse’s benefit at normal retirement age.
Again, this would be 67, whichever one’s higher. So in this example being the same age, and this couple is five years away from retirement. Again, spouse A, 3000 a month, spouse B, 1000 a month, both worked in the same business.
If we continue the trajectory of paying them both the same salary, spouse b who had the lower benefit, even if their Social Security benefit were to start creeping up from 1000 to 1100 to 1200 a month, that would be irrelevant to their financial plan or their retirement plan specifically because spouse b would never receive.
Their own benefit, they would receive 50% of their spouse’s benefit, which is the higher 50% of 3000 be 1500. So their 1000 or even a little bit higher would not have become relevant. And even if spouse a passes spouse b inherits 100%, they go from making 50% of that spouse to security.
So if they were both living a happy life, spouse a will be receiving 3000 a month. Spouse b would be receiving half of that 1500 a month. But if spouse a or b passes, the higher of the two always stays.
So if spouse a passes, the 1500 month would stop and the 3000 month would continue. And again, if spouse b passes the lower of the two, the $1,500 would go away, but the 3000 a month would continue on.
So in this case, we evaluated and actually there’s a tool on SSA gov, Social Security administration, gov, they will have a record of your entire earnings history. And so in this case, we looked at, well, spouse aid is a lot of things predicate in spouse aid.
Social Security benefit one, it’s the higher of the two that’s going to stay if one of them passes. And two, the second spouse is going to receive 50% of that benefit. So our focus then became how can we get that benefit as high as possible?
Looking back at the last 35 years of their earning records, they didn’t always make what they did today. And there were some pretty low earning years 30 to 35 years ago. So this couple, being an s corporation, purposefully at the low w two, we kept spouse b’s w two low.
But we purposefully increased spouse a’s w two because Social Security is a tax that works off of up to a little bit over $147,000 of income of w two income. So by increasing spouse a’s w two, they paid higher into the Social Security system.
But we now replaced the highest capped out years today and planned to do so for the next five years and got rid of five years of. Income years when they first started their career. So that is going to significantly boost up spouse A.
Social Security. In this case, it’s going to go from $3,000. It’s going to go up $300 a month. So that’s $3,600 a year for spouse A. But remember, spouse B also gets half of that. So it’s one $800 a year.
So in this case, that’s $5,400 per year. Let’s assume a 20 year retirement. That’s $100,000 more they’re going to get. And in this case, they weren’t going to pay nearly $100,000 in Social Security taxes to get that benefit.
So because the Social Security system, it’s not a present value calculation of when you earn those years higher or lower, whether those were 40 years ago or those today, they’ll just look at the best 35 years.
A lot of case it makes sense to pay attention, especially five or ten years leading into retirement. Are you maxed out in Social Security? If not and you’re married, can you get that higher of the two benefits maximized as much as possible because there are several factors that work off of that highest Social Security benefit.
We look forward to answering any questions you have around Social Security and how to maximize this, especially if you’re a business owner, have the flexibility of how much you pay yourself. A lot of neat things you can do to maximize your benefits.