Small business owners are consumed with day-to-day operations and may not know details about the Social Security contributions they make. But, with an estimated 40% of older Americans living solely on Social Security and employers contributing half of each employee’s payments wages, the following information is important regardless of where you land in this divide†.
Let’s first walk through Social Security basics, then dig into what’s involved with small business owners paying into Social Security, and the benefits those owners can expect.
Social Security 101
Social Security became law in 1935 to provide a portion of retirement income for qualifying Americans, which is made possible through Social Security taxes workers pay over their lifetime¶. Intended not to completely replace a worker’s salary, monthly Social Security payments are determined by years worked, annual income, and when a person 62 or older decides to take Social Security. Though we won’t delve into here, Social Security benefits are also available to qualifying widows, widowers, minor children, and disabled workers#.
The Social Security Administration provides a simple but really helpful calculator to determine how much Social Security will provide after retirement. After creating an account, the amount you could expect is determined by entering your potential retirement dates and earned income until you retire. You should also be able to review your annual earnings going as far back as when you started paying Social Security taxes.
This Huntington Social Security Benefits Calculator also helps project how much you can expect to earn. Both calculators underline the importance of planning ahead to stay ahead of the game.
The future of Social Security is difficult to foresee, but there are reasons for caution. According to The 2023 Social Security Trustees Report, Social Security’s total cost is projected to be higher than its total income in 2023 and beyond. A silver lining is that at least until 2097, benefits would be 77% of scheduled benefits§.
This scenario highlights the need to plan ahead and discuss your situation with a Huntington Private Banker.
Social Security contributions
A small business owner might not rely solely on Social Security during retirement, but some of their employees may, so the particulars surrounding contributions should be understood. Tax filings are different for business owners and may depend upon what type of a business you run, so contact a tax expert for details.
Social Security tax is imposed only on the first $160,200 of wages per year. When it comes to paying Social Security taxes, the business owner pays half (6.2% of earned wages for that period) for each employee, and every employee will pay the other half (another 6.2% of earned wages) for a total of 12.4%. The business owner also will pay the full 12.4% of their wages to cover their Social Security requirement‡.
You won’t withhold Social Security taxes from each paycheck but instead, you will pay the Social Security taxes on your earnings when you file your annual federal income tax return or when you pay your required quarterly tax estimates. The Social Security contribution is included in FICA taxes that also comprises Medicare. Here is a current two-page guide from the Social Security Administration with more details.
Three things to consider:
- If you’re self-employed, you almost always pay the employee and employer portions of Social Security taxes.
- Reducing your income by filing all possible deductions may help reduce your taxes, but may also reduce your Social Security benefit payment.
- Social Security benefit payments are based on your 35 highest-earning years.
A few exceptions
There are groups exempted from paying Social Security, but also ineligible for benefits:
- Members of certain recognized religious groups
- Nonresident aliens
- Temporary student exemption
- Employees of foreign governments
Your Social Security benefits
It should be stressed that if self-employed, you’re also your own employer, and are responsible for contributing your entire Social Security contribution amount.
The benefits small business owners get are very similar to employees who work for someone else. A tax expert may help you, but generally, deductions you claim can significantly reduce your taxable income. This could decrease your current Social Security taxes and potentially reduce your benefits later.
For business owners and their employees to get the most out of Social Security benefits, appropriate payments should be made into the system on a timely basis. To learn more, please contact your Huntington Private Bank team to see how we can help, or find a Huntington Private Bank Office near you.