By RUSSELL GLOOR
Social Security Advisor
Dear Rusty: My wife and I own a small company, so we can allocate our pay as we wish. She had not paid into Social Security in her career so six years ago her pay was increased so she paid more into Social Security, and me less. My yearly Social Security statement showed I went from about $3200 in estimated benefits per month to about $2800. We plan to work about another five years, so how should we allocate our pay? And can you recommend a resource for us to get more in depth understanding of how Social Security works? Signed: Small Business Owner
Dear Small Business Owner: The reason your benefit estimate went down is that when estimates are done before you’ve reached your full retirement age (FRA), they assume that you will continue earning at your most recent level until you reach your FRA. So, when you reduced your annual earnings it also reduced your estimated Social Security benefits. By raising your wife’s earnings, she has now been accumulating “quarter credits”; six years of work equals 24 quarter credits for your wife, but she needs 40 to claim benefits on her own work record. The question you should ask yourself is this: Will any benefit your wife gets from her own work record be greater than half of your benefit at full retirement age? (FRA is 66 plus two months for you and 66 plus four months for your wife.) Your wife’s benefit after she accumulates the 40 credits will presumably be small in comparison to yours. And even if she gets a small benefit on her own record, as your spouse at her full retirement age she’ll be entitled to half of the benefit you were entitled to at your full retirement age (you must be already collecting). Let’s use an example:
• If you continue to allocate earnings to your wife for another four years she will be eligible for a small “retirement” benefit based upon her own minimum earnings record.
• When you start collecting your own benefit your wife’s spousal benefit amount will be half of yours if she takes it at her FRA (reduced if she takes it sooner).
• Your wife’s total benefit (her own and her spousal benefit) will at maximum be half of yours; so even if she has a small benefit on her own she’ll still get only up to her spousal benefit amount which will (presumably) be considerably higher than her own.
• If you allocate more/most of your business earnings as payroll to yourself, you will be increasing your own benefit, but you will also be increasing your wife’s spousal benefit because she will get half of whatever your FRA benefit is, regardless of what her own benefit is (unless her own benefit would be more than half of yours).
Keep in mind that only your earnings up to Social Security’s “payroll tax cap” count. That is $128,400 for this year (changes annually), so you really don’t need to allocate any more than that to yourself to improve your own benefit. If your business earnings are more than that you can allocate any excess to your wife, so she can earn more quarter credits because any excess won’t be otherwise used to improve your SS benefit. But unless her estimated benefit exceeds half of yours she will still only get half of yours. While I can’t make the decision for you, I hope this gives you enough information to make the right choice on how to allocate your company’s earnings as payroll.
You asked for a resource to get a more in-depth understanding of Social Security, and I recommend that you try our AMAC Foundation Social Security website for all of the latest information about the complex topic of Social Security. You might want to peruse the Q&A section, which contains numerous articles I have written about Social Security matters, including much more depth on Spousal Benefits.
The information presented in this article is intended for general information purposes only. The opinions and interpretations expressed in this article are the viewpoints of the Association of Mature American Citizens Foundation’s Social Security Advisory staff. To submit a question, contact the Foundation at firstname.lastname@example.org.