Social Security question for self employed

[jyl]

I just realized that I might be screwing up my future Social Security benefit.

I was a W2 employee working for companies from 1983 to 2020. In 2020 I opened my own office. For one year I was filling as a sole proprietor, paying employment and self employment taxes including FICA on my entire business income. Starting 2021, I have filed as a S-Corp and employ myself as a W2 employee. I pay myself a salary, on which I pay FICA, and take the rest of my business income as owner draw. My salary is fairly modest, which reduces my FICA tax.

Okay, so what I’m wondering is if I would be better off increasing my salary and hence FICA tax, to maximize my Social Security benefit in retirement. I’m 60, like my work, and would like to keep doing it for a long time, so retirement is likely 7-10 years away.

How can I figure this out?

I was thinking I could dump my income history from the Social Security website into a spreadsheet, go look up the formula used to calculate future benefit starting with https://www.ssa.gov/pubs/EN-05-10070.pdf, and then plug in various possible salaries for 2024 until retirement, and estimate the resulting SS benefit in the future as well as the resulting FICA in the present.

Is there a pre-built calculator anywhere, or are there people who consult on this stuff?

[KFC911]

John, I'd bet (and I don't wager ) that you have already paid in enough to draw full SS benefits if you choose to wait .... but I'm just basing that upon my own personal experience.

Never counted on it .... and was pleasantly surprised .... good luck!

[Zeke]

If you haven't, you can create a SS account and log in to see where you stand. From there you can do the math. KC is likely correct that as a well paid W2 you have contributed (or will) enough. Now SS being based on earnings of a certain set of quarters seems complicated to me. But it takes in consideration of 35 years of earnings. I can't be sure, but it doesn't seem you can hurt yourself much by making less in the last few years. But I'm not a consultant. Maybe you should grab your info and see a CPA.

At age 60 you should be getting a mailed statement account or not.

[icemann427]

I chose to take my SS at the age of 62 because I did a cashflow and determined I would be 77 before I would break even with the increased amount I would receive at 66. At almost 71, I have 6 more years to see if I make it...I do not know if the break even point changes based upon your benefits vs mine. As such, you should analyze what you would get at 62 and 66 and make that determination.

You and I are exactly alike as I have an "S" Corp and pay myself a W-2 salary. If you choose to take SS at 62, you are limited in how much "net" income you can make before it affects your SS benefit amount. As such, you need to look at that. There are ways to eliminate/reduce that problem like hiring your wife and paying her a salary; leasing a business vehicle; purchase business related items; etc.

Once you turn 66, though, there is no limit in income and the amount no longer affects your benefits. Also, each year you pay into SS before you truly retire, the following year's SS benefit will go up a little because of the previous year's annual payment.

[jyl]

Oof modeling one's SS benefit is complicated. I "think" it works like this - but still need to verify, might end up calling SSA.

1. take every year's SS taxable earnings during lifetime
2. compute "index factor" for each year (index factor = average national wage for your retirement year / average national wage for the year being computed)
3. multiply each year's SS taxable earnings by index factor to get "indexed earnings" (this is basically your SS taxed earnings for that year adjusted for wage inflation)
4. find the 35 years with the highest indexed earnings
5. sum the indexed earnings of those 35 years
6. divide by 420 to get "average indexed monthly earning" (AIME)
7. look up the "first bend point" and "second bend point" for your retirement year
8. calculate "primary insurance amount" (PIA) as 90% of the first bend point + 32% of AIME between first and second bend points + 15% of AIME above second bend point (basically, the SS benefit is designed to replace more of low AIME and less of high AIME)

Benefit is reduced if you retire before age 67 which hopefully won't apply to me. Benefit is increased if you retire later than age 67, by 8% per year, up to age 70. After you retire, benefits are adjusted by inflation-based cost of living adjustments ("COLA").

I am pretty sure (but since this is the key point, need to verify) that the PIA calculation is done as of your retirement date or age 70, whichever is earlier. Thus additional high-income years up to age 70 can potentially affect your PIA . . .

. . . or not, as I'm finding.

Basically, the AIME calculation uses only your 35 highest indexed earning years, so if you will have a long working history when you retire, say 50 years, then many or most or even all of your lowest indexed earning years will be excluded from the calculation. If you add some high indexed earnings years to the tail end of your earnings history, they do displace low indexed earnings years, but the lowest years were already excluded from AIME. With the cap on SS taxable earnings, the scope to affect your benefit is limited, maybe very limited.

As best I can tell, regardless of my future SS taxable earnings, my PIA assuming retirement at 70 can only change <$100/mo. KC, you won your bet.

All of these are based on assumptions for future inflation. Inflation changes the PIA quite a bit, but doesn't change the sensitivity of PIA to future earnings.

YMMV of course. If your top 35 indexed earnings years currently include many low indexed earnings years, then tacking on some high indexed earnings years to the end of your earnings history may have a larger effect.

P.S. if anyone's interested, I can clean up my spreadsheet calculating this, and share it.

[GH85Carrera]

As JYL says above, it is mostly weighted to your highest earning years. If you are earning less now, don't worry about it as the payments are based on the better years.