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How Social Security Works If You’re Self-Employed

Scott Smith
2 min read
How Social Security Works If You’re Self-Employed

When it comes to planning for retirement, your 401(k) and Individual Retirement Account (IRA) are both great tools to have in your toolbox. For real estate investors, I am particularly fond of the self-directed, or solo 401(k)—what the IRS calls a one-participant 401(k).

But you can’t forget your Social Security benefits as a key part of the solution. We all see the deductions on our pay stubs, but there’s quite a bit else about the program that many don’t know.

Signed into law by Franklin Delano Roosevelt in 1935, the Social Security Act was part of the sweeping New Deal social programs that stabilized the American economy during the Great Depression. The act established a trust fund that would be paid into by workers with each paycheck. Funds were to support those workers when they retired (and their survivors after they died). The program was expanded in 1965 to also include disability benefits.

Related: Using a Solo 401k To Invest in Real Estate: How Does It Work?

Here are a few other things you should know about your Social Security benefits.

Social Security: Understanding the Benefits

The Pool of Money Is Enormous

As of April 2020, there is nearly $2.9 trillion in the fund. In fact, there is so much in the American Social Security trust fund that it eclipses the GDP of every single country in the world except China, Japan, Germany, and India.

That Money Supports Millions

While $2.9 trillion is a massive amount of money, a whopping $1 trillion of that was paid out in 2019 to 64 million beneficiaries. Luckily, there are at least 178 million workers paying into the trust fund each year to replenish the fund for the next generation of retirees.

Related: Retirement Planning: Why Business Trusts May Be a Smarter Choice Than an LLC

Social Security Income Is Subject to Income Tax

Up until the act was amended in 1983, Social Security benefits were not considered taxable income. Nowadays, individuals collecting more than $25,000 (or $32,000 as a couple) annually are subject to income taxes on 50% of those benefits. For retirees receiving $34,000 or more ($44,00 for a couple), 85% of their benefits are taxable income.

Social Security Ahead Green Road Sign Over Dramatic Clouds and Sky.

Your Success Dictates Your Payout

Though you have paid into the trust fund through your entire employment history, your 35 most well-paid years are used to determine your retirement payout. This means your income shouldn’t be negatively affected by the years of minimum wage work in high school or college.

Benefits Can Change Without an Act of Congress

In years past, the only way beneficiaries could see a higher payout was if Congress passed legislation doing so. As of 1975, that responsibility moved to be done automatically at an administrative level within the Social Security Board.

Related: Land Trusts, Living Trusts, and Making Smart Estate Planning Decisions

A vast majority (73%!) of retirees choose to start receiving their benefits at age 62, but if you can live and thrive off your other retirement accounts and postpone drawing on your Social Security benefits for a few years, you can receive a higher monthly benefit. A professional can help you navigate these questions and determine the best time to start receiving Social Security benefits based on your other retirement assets.

Self-Employed Real Estate Investors Can Collect

All this works a little differently for investors who are self-employed. Self-employed people earn Social Security work credits the same way employees do and qualify for benefits based on those work credits and earnings. They pay Social Security taxes on all of their earnings, up to the $142,800 cap in 2021.

The difference comes with business tax deductions. If you work for yourself, deductions you claim on Schedule C can make your taxable income substantially lower. That can decrease your Social Security taxes now, but it may also decrease your Social Security benefits later.

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What other questions do you have about Social Security?

Let’s discuss in the comment section below. 

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.