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Social Security Basis
Table Of Contents
By Jason Watson, CPA
If you believe Social Security will remain funded by the time you retire, you might be short-changing yourself since your salary will be used to gauge future retirement benefits. Remember, K-1 income from your S Corp is not subjected to self-employment taxes and therefore will not count towards your Social Security benefits basis.
Conversely the tax money you save today can make excellent retirement investments which can counteract the loss in Social Security benefits. In other words, the savings in Social Security taxes today might exceed the loss in future Social Security benefits if those savings are invested correctly.
The maximum Social Security benefit for 2021 is $3,957 per month for those who delay until age 70, or $3,135 for those who start benefits at full retirement age (FRA). Our apologies for not updating this data in a while, yet it remains relevant.
Using SSA.gov’s calculator, at $60,000 in salary with an age of 50 your benefit would be $1,955 at age 67 in today’s dollars. A $100,000 salary would have a benefit of $2,675.
| Social Security Wage Limit (2021) | 142,800 | ||||||||
| Max Benefit Retiring at 67 Years Old | 3,135 | ||||||||
| Max Benefit Retiring at 70 Years Old | 3,957 | ||||||||
| Retire at 67 years Old | Retire at 70 years Old | ||||||||
| Salary | % of Max | Benefit | % of Max | Delta | Benefit | % of Max | Delta | ||
| 20,000 | 14% | 1,037 | 33% | 19% | 1,306 | 33% | 19% | ||
| 40,000 | 28% | 1,496 | 48% | 20% | 1,897 | 48% | 20% | ||
| 60,000 | 42% | 1,955 | 62% | 20% | 2,487 | 63% | 21% | ||
| 70,000 | 49% | 2,185 | 70% | 21% | 2,782 | 70% | 21% | ||
| 80,000 | 56% | 2,415 | 77% | 21% | 3,078 | 78% | 22% | ||
| 90,000 | 63% | 2,567 | 82% | 19% | 3,227 | 82% | 19% | ||
| 100,000 | 70% | 2,675 | 85% | 15% | 3,365 | 85% | 15% | ||
| 120,000 | 84% | 2,890 | 92% | 8% | 3,642 | 92% | 8% | ||
| 142,800 | 100% | 3,135 | 100% | 0% | 3,957 | 100% | 0% | ||
Whoa! Look at those deltas between salary and benefits right around $90,000 to $100,000 in salary. This would suggest that salaries above $90,000 have a steep diminishing return on increasing SSA benefits. Or, said differently, salaries below $90,000 have a good retirement benefit for your salary buck. Additionally, consider that paying $140,000 costs about $7,500 in additional taxes without a corresponding strong future benefit ($50,000 x 15.3%). We’ll explore this more in our chapter on reasonable shareholder salaries.
Of course, there are a ton of assumptions in terms of age and consistency of earnings, but the table above illustrates some interesting points. You can probably imagine that this gets tricky right quick. Can I parlay my self-employment tax savings into better retirement benefits than the Social Security Administration? Probably. Are SSA benefits going away? Probably not, but they might become means tested and restricted in other ways.
Here is a link to SSA’s online calculator-
Taxpayer’s Comprehensive Guide to LLCs and S Corps 2023-2024 Edition
Taxpayer’s Comprehensive Guide to LLCs and S Corps 2023-2024 Edition This KB article is an excerpt from our 420+ page book (some picture pages, but no scatch and sniff) which is available in paperback from Amazon, as an eBook for Kindle and as a PDF from ClickBank. We used to publish with iTunes and Nook, but keeping up with two different formats was brutal. You can cruise through these KB articles online, click on the fancy buttons below or visit our webpage which provides more information.
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