Business Owners

Restructuring Business Entity to Minimize Social Security Payroll Taxes

Posted on March 15, 2023 by fsykes - Business Owners

What is restructuring a business entity?

Restructuring your business entity can minimize Social Security taxes

If you own a business as a sole proprietorship, you may be able to minimize the Social Security taxes you pay by incorporating your business and causing the business to elect to be taxed as an S corporation. If your business is treated as an S corporation for federal income tax purposes, then you may be able to continue to benefit from a single level of tax on your business earnings, while minimizing the portion of your business earnings that are treated as wages or self-employment income subject to Social Security taxes.

How does it work?

S corporation owners are considered employees of the corporation

If you own a corporation and perform substantial services as an officer of that corporation, you’re not treated as self-employed for tax purposes; rather, you’re treated as an employee of the corporation. Because you’re not self-employed, you don’t pay self-employment taxes. However, as an employee, both you and the corporation have to pay Social Security payroll (FICA) taxes on your salary. If you’re both an officer of your corporation and a shareholder, you may be able to reduce the amount of FICA tax you pay by receiving some of your compensation as corporate dividends.

Corporate dividends can reduce your payroll taxes

As a shareholder, you can withdraw earnings from your corporation in the form of dividends. You won’t have to pay Social Security payroll taxes on that part of your corporation’s earnings, because investment income is not subject to FICA taxes. You will only pay FICA taxes on the wages you receive from the corporation.

Strengths

You can reduce the amount of Social Security payroll taxes you owe

Incorporating your business and causing it to elect to be taxed as an S corporation can save you money by reducing the amount of Social Security payroll taxes you owe if, as a shareholder of the corporation, you withdraw part of the corporation’s earnings in the form of corporate dividends, rather than withdrawing such earnings as wages.

Tradeoffs

Setting up a corporation can be expensive

Operating a sole proprietorship is simpler and less expensive than operating a corporation. If you incorporate your business and elect for it to be taxed as an S corporation, you will have to pay incorporation fees, and you may have to hire accounting, tax, or legal professionals to advise you. There are a number of requirements that must be satisfied for a corporation to be eligible to elect to be taxed as, and continue to qualify as, an S corporation.

The Internal Revenue Service (IRS) may challenge your compensation structure

The IRS may audit your business and it may recharacterize all or a portion of any dividends distributed by the corporation to you as wages if it believes that the corporation is paying you compensation that is unreasonably low in order to avoid Social Security taxes. To avoid this, you must pay yourself an annual salary that is reasonable considering the work you actually do for the corporation during the year. (The IRS may, in certain circumstances, challenge unreasonably high compensation as well.)

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Broadridge Investor Communication Solutions, Inc. prepared this material for use by Social Security Benefit Planners, LLC.

Broadridge Investor Communication Solutions, Inc. does not provide investment, tax, legal, or retirement advice or recommendations. The information presented here is not specific to any individual’s personal circumstances. To the extent that this material concerns tax matters, it is not intended or written to be used, and cannot be used, by a taxpayer for the purpose of avoiding penalties that may be imposed by law. Each taxpayer should seek independent advice from a tax professional based on individual circumstances. Social Security Benefit Planners, LLC provide these materials for general information and educational purposes based upon publicly available information from sources believed to be reliable — we cannot assure the accuracy or completeness of these materials. The information in these materials may change at any time and without notice.

Social Security Benefit Planners, LLC and its affiliates are in no way associated with or approved, endorsed, or authorized by the Social Security Administration.

Top Tips for Business Owners to Maximize Retirement Income

Posted on July 14, 2017 by fsykes - Business Owners, Social Security Benefits

Are you a business owner with an at-home spouse who helps out with bookkeeping or a variety of other tasks that need to be done? Once you get to retirement age it’s too late, but for those of you that are in your 20’s, 30’s, 40’s or even 50’s there’s still time to let these efforts build future benefits. Paying your spouse at least $4,880 a year will ensure that they continue to vest into the Social security system, which will help you at retirement time.

To fully vest you need to earn 40 credit hours, with a maximum of 4 credits per year at $1220 per credit. Spouses who are not vested can still pull a half benefit off of their working spouse’s retirement benefit (or ex-spouse’s, if married over 10 years). If widowed after being married 9 months or more, you can draw benefits up to your deceased spouse’s full amount, depending on what age decide to file.

If both spouses have work history the social security retirement benefits picture can drastically change for the better. With two vested partners you’ll also have more options, such as the potential for the lower earning spouse to pull earlier while delaying the higher earning spouse’s filing until age 70 to get the highest benefit. And don’t forget that social security disability benefits are hinged on a person working at least 5 out of the last 10 years, which can help when the worst happens.

As you can see, it’s in your best interest to ensure that the work both partners contribute to your business is recognized as paid employment by the Social Security Administration. We offer a pre-check social security flat fee planning option that will help you review where you are today and give you insight about the impact on future income you can make by ensuring that both spouses are being paid for the work that they do.

Please “Select a Plan” so we can get started on maximizing your social security benefits or take our quiz to find out how much you know about your social security.

Stop Screwing Yourself, Business Owners!

Posted on July 6, 2017 by fsykes - Business Owners, Social Security Benefits

Business owners typically prioritize the success of their company over other financial goals. That’s a good thing in general, but it’s important to keep a balance or you could be creating a host of long-term financial problems for yourself while you’re trying to do the right thing.

A common pattern I see with my clients is that they pay themselves as little as possible and put the vast majority of the available money back into the business. That may be good for the business but it’s not necessarily a smart move for your overall financial picture. When it’s time for retirement, problems arise:

Little Social Security income. By keeping the amount you pay yourself low over the years, you deprive yourself of Social Security benefits you might have been able to collect later. The amount of monthly benefit you receive is calculated based on your average earnings over a 35-year period. If you didn’t pay yourself much, the government won’t either.
Minimal retirement savings. When you plough all the profits back into the company you reduce the amount available to fund your personal retirement account. That means you don’t have a substantial nest egg that’s growing to take care of you once you’re ready to hand the business over to new owners.
Expecting too much. Selling your business when retirement beckons may deliver a nice bundle to provide for your financial needs in the coming years. Then again, it might not. Economic conditions shift, and the type of business you own can make a huge difference in the amount you can actually sell it for.

Take care of your business, but be sure to look out for your own best interests as well. Paying yourself a fair wage and investing in assets like equities and real estate are just as important as that new equipment or extra staff member your company could use. The money you pay into Social Security and invest privately will work together to give you a higher income in retirement than you’d have otherwise.

If you’re not sure how much you should be paying yourself or investing, please contact us today and we’ll help you find the right balance. You deserve a comfortable retirement!

Social Security Benefit Planners
800.270.SSBP (7727) info@socialsecuritybp.com

What Every Expat Needs to Know About Social Security

Posted on November 4, 2016 by fsykes - Business Owners, International & Expat Benefits

So you’ve decided to work or retire out of the good old USA. How does this affect your Social Security and Medicare benefits? The answer varies by country, and it can work out better for you in some countries versus others.

About 20 countries have agreements to prevent double taxation. In the rest, you will pay taxes to your host country as well as Uncle Sam.
About 25 countries maintain bilateral agreements that allow you to transfer Social Security credits to and from the U.S. For example, if you work in the U.S. for 20 years and then move to Canada and work there for another 10 years, when you retire you can transfer your U.S. credits to Canada to vest into their system (or vice versa).
There are a few countries, such as North Korea and Cuba, where you will not be allowed to receive Social Security benefits while living there.
Your non-U.S. spouse may or may not be entitled to your benefits if you were to pass. The laws vary by country and are quite complex.
If you think you will ever move back to the U.S., then it is very important to sign up for Medicare part A, which is free, at age 65. There are ways to opt out of part B if you qualify, but if you do not sign up for part A there are permanent penalties that will persist throughout your retirement.
If you worked overseas and did not pay into Social Security for certain years, your pension from that country will most likely trigger a Windfall Earnings Provision (WEP) that partially offsets your Social Security benefit.

Determining retirement benefits for expats can be a confusing and complex, with many country-specific rules that change over the years. If you need help navigating Social Security options for expats and their families, reach out to us and let’s get you a plan in place!

Simple Tips to Help Business Owners Maximize Retirement Income

Posted on November 4, 2016 by fsykes - Business Owners, Spousal Benefits

social security benefits for business owners

Are you a business owner with an at-home spouse who helps out with bookkeeping or other tasks that need to be done? Once you get to retirement age it’s too late, but for those of you in your 20’s, 30’s, 40’s or even 50’s there’s still time to let these efforts build future benefits. Paying your spouse at least $4,880 a year will ensure that they continue to vest into the Social Security system, which will help you at retirement time.

To fully vest you need to earn at least 40 credit hours, with a maximum of 4 credits per year at $1220 per credit. Spouses who are not vested can still pull a half benefit off of their working spouse’s retirement benefit (or ex-spouse’s, if married over 10 years). If widowed after being married a year or more you can draw benefits up to your deceased spouse’s full amount, depending on the age when you decide to file.

If both spouses have work history, the Social Security retirement benefits picture can drastically change for the better. With two vested partners you’ll also have more options, such as the potential for the lower-earning spouse to pull earlier while delaying the higher earning spouse’s filing until age 70 to get the highest benefit. And don’t forget that Social Security disability benefits are hinged on a person working at least five out of the last 10 years, which can help should the worst happen.

As you can see, it’s in your best interest to ensure that the work both partners contribute to your business is recognized as paid employment by the Social Security Administration. We offer a pre-check Social Security planning option that will help you review where you are today and give insight about the impact on future income you can make by ensuring that both spouses are being paid for the work that they do.

Please contact our office to learn more or sign up today to start planning for your retirement.

Business Owners: Stop Screwing Yourself on Social Security!

Posted on October 11, 2016 by fsykes - Business Owners

Little Social Security income. By keeping the amount you pay yourself low over the years, you deprive yourself of Social Security benefits you might have been able to collect later. The amount of monthly benefit you receive is calculated based on your average earnings over a 35-year period. If you didn’t take pay yourself much, the government won’t either.
Minimal retirement savings. When you plough all the profits back into the company you reduce the amount available to fund your personal retirement account. That means you don’t have a substantial nest egg that’s growing to take care of you once you’re ready to hand the business over to new owners.
Expecting too much. Selling your business when retirement beckons may deliver a nice bundle to provide for your financial needs in the coming years. Then again, it might not. Economic conditions shift, and the type of business you own can make a huge difference in the amount you can actually sell it for.