Q: My husband and I run a small business. We are in our early 50s. Our profits are modest, but usually enough to reach the Social Security taxable maximum. For years now, my husband has reported all the income under his name for Social Security purposes. We do this for two reasons. One: We think we will come out ahead if he has a bigger Social Security check. And two: I am a few years younger than my husband, and I think Social Security will be broke by the time I hit retirement age. So why should I bother paying into the system? What do you think of our plan?
A: You may be onto something with your first bit of reasoning. And I will give you some food for thought about that in a minute. But you are way off base with your “Social Security will be broke so why pay into it” way of thinking.
For almost 50 years now, people have been telling me that the system will go belly up before they ever have a chance to collect benefits. Of course, the people who told me that a half-century ago have been getting benefits for decades now (assuming they are still alive). Social Security has been paying benefits for more than 80 years. How long must the program be around before people accept the fact that it is here to stay?
Sure the program faces some challenges because of the retirement of the baby-boom generation. But with a few relatively modest tweaks to its tax and benefit structure, it will be around for another 80 years.
So now let’s get back to your idea that you and your husband come out ahead if all the Social Security credit goes in his name. I will give you a couple of examples that show how your Social Security benefits might play out depending on how you report your business income on your tax return.
Plan A is the reverse of what you are doing now. In my Plan A, you and your husband split the business income equally. For example, let’s assume your business is paying taxes on the maximum Social Security taxable income — currently $128,400. In other words, both you and your husband would claim half of that, or $64,200. The Social Security part of a self-employment tax return is called the Schedule SE. Each of you would file a Schedule SE reporting $64,200 to your respective Social Security accounts.
And that means when you hit retirement age, both you and your husband would have roughly equal Social Security retirement benefits. (Of course, your actual benefit amounts could be impacted by other variables, like your dates of birth and any other income each of you might have before or after your business venture.)
But let’s just say, using today’s dollars, that each of you end up with $1,600 per month each in a Social Security retirement benefit. Your total Social Security income would be $3,200 per month.
But you and your husband are currently doing what I will call Plan B. You report all the business income on the Schedule SE under your husband’s name and his Social Security number.
When he reaches retirement age, he would end up with a much higher retirement benefit (let’s say $2,600 per month). And because you would have no Social Security on your own record, you would be due up to one-half of his benefit — or $1,300 per month in dependent wife’s benefits. Your total Social Security income would be $3,900 per month.
So at first glance, you would say that’s a no-brainer: Doing what you are currently doing (Plan B) is the better choice — from a strictly monetary Social Security retirement perspective.
But from your own perspective, the Plan B scenario could turn out to be a big mistake. Over my career of 45-plus years dealing with Social Security issues, I have heard from thousands of women who were involved in a mom-and-pop business where pop employed Plan B (i.e., he took all the Social Security credit on their tax returns). And in many of these instances, the couple ended up divorced. And guess what happens to poor old mom? She has little or no Social Security credit for all the years of work she put into the business, which means she has little or no Social Security retirement. If you never remarry, you probably would collect divorced spousal benefits on your husband’s account. But that could end up being a meager return for your many years of contributions to the business.
However, let’s say you can absolutely guarantee that you and your husband will remain in wedded bliss forever. There are still a couple other reasons why Plan B may not work out for you.
One is the issue of Social Security disability benefits. We all don’t stay healthy until our golden years. There is a decent chance you might become disabled before reaching your mid-60s. Under Plan B (where your husband gets all of the Social Security credits), you would have absolutely no disability coverage from Social Security because you weren’t paying into the system. Whereas under Plan A (where you split the Social Security credits), you would qualify for monthly Social Security disability benefits if something happens to you — and that could be potentially very valuable coverage for you and your family if that were to happen.
And speaking of family, you also have to consider the possibility that you might die. For example, if you pass away and if you have a couple of kids still at home when that happens, Plan B would provide no monthly survivor benefits for the children. But Plan A would be like setting up a little life insurance policy — a policy that could be worth hundreds of thousands of dollars over the years to your family.
As I said so often over the years, I have seen many moms getting the short end of the Social Security stick in a mom-and-pop business — because husbands and/or their accountants employed Plan B without thinking things through. So you and your husband really need to talk things over before continuing on your current course.
