Retirement is a journey. Getting where you want to go requires a plan.
A common question asked by business owners is whether or not they should put a spouse on the payroll to make them eligible for their own Social Security benefits. The wives of working husbands already qualify for spousal benefits, but these benefits are only 50% of the working husband’s primary insurance amount. Is it worth it to pay Social Security taxes on her so she can qualify for her own benefit?
Social Security’s progressive formula means that the more you earn, the higher your benefit will be. But will your benefit be enough higher to justify paying the higher SE taxes? Let’s do some calculations using the Social Security Administration’s Detailed Calculator on the Social Security website. Our hypothetical couple, Jerry and Jamie, are both 55 years old. Jerry has paid himself the maximum Social Security wage base since he was 30. Jamie has drawn no salary at all.
If Jerry continues to pay himself the Social Security wage base until he is 66, his primary insurance amount (PIA), or the benefit he will receive if he files for it at full retirement age, will be $2,824 in today’s dollars, according to the SSA Detailed Calculator. If Jamie reaches full retirement age (FRA) with no earnings record of her own, she will be entitled to a spousal benefit of 50% of Jerry’s PIA, or $1,412. Their combined benefit at full retirement age will be $4,236.
If Jerry continues to pay himself the maximum wage base and adds Jamie to the payroll at $20,000 a year for the next ten years, Jamie’s PIA on her own work record will be just $428, which is well below the spousal benefit. This would cost them more than $30,000 in self- employment taxes on Jamie’s salary with no bump in Social Security benefits. It may not be worth it.
If Jamie goes onto the payroll at maximum salary, she could build her PIA up to $1,399. If Jerry is also receiving maximum salary, they would have a combined monthly benefit of $4,223 ($2,824 + $1,399). This is slightly less than what they would receive if Jamie just received a spousal benefit without taking any salary: $4,223 vs. $4,236. Yet they would have paid about $170,000 in additional self-employment taxes on her salary.
What if Jerry stops paying himself while paying Jamie the maximum Social Security wage base for the next 10 years? This will cost them no additional SE taxes because they are just assigning Jerry’s salary to her.
Now Jamie’s PIA will be the $1,399, but Jerry’s PIA will drop to $2,443, for a total benefit of $3,842.Compared to the status quo, where Jerry receives maximum salary while Jamie receives no salary, assigning the salary to Jamie would net them a lower monthly benefit: $3,842 vs. $4,236. It would also reduce Jamie’s survivor benefit if Jerry dies first: $2,443 vs. $2,824 (or $3,016 vs. $3,502 if he delays to age 70).
So the clear conclusion in this hypothetical case is that it would not be worth it for Jamie to start drawing a salary. If they pay her a minimal salary, they would pay additional SE taxes for a benefit she can’t use. Even if they pay her a high salary, it would give her a benefit that’s just about on par with the spousal benefit and costs them an additional $170,000 in SE taxes. If they stop paying Jerry and assign his salary to her, there would be no additional SE taxes, but it would lower their combined monthly benefit and significantly reduce her survivor benefit.
The conclusion here is that the payment of self-employment taxes for a spouse over a 10-year period of time does not result in a Social Security benefit that is enough higher than the spousal benefit to justify paying the SE taxes. It’s essentially money down the drain.
*Safe Harbor Retirement Planning does not provide legal or tax services. You should consult a legal or tax professional regarding your individual situation.
Mark Singer, CFP® lives in Swampscott and has been in the financial industry for over three decades. If you have any questions contact him at 781.599.2660 or firstname.lastname@example.org. The content was developed in conjunction with Elaine Floyd, CFP®.