If one sets up a LLC and takes a salary/dividend split via their LLC does all of the money get counted to determine eligibility to continue to receive social security payments? Or....does just the salary portion get counted as wages for eligibility?
Hopefully that makes sense.
To my knowledge, only earned income has FICA deducted. LLC's don't actually have stock, however S Corps do have stock which is where you get to differentiate the income, as well as a C Corp (which gets double taxed). In LLC's the taxation depends on your role in the company.
Yeah...I am wondering if the money taken as "dividends" counts as something that decreases social security dollars. My dad was asking me about this tonight and I told him that I understood how to reduce FICA, but that I didn't know what the rules were about social security income.
Dividends and other passive income is taxed as capital gains, which aren't subject to FICA (which SS is part of). What you dedicate to salary pays state and federal income taxes, as well as FICA. Dividends do not. The IRS does keep tables on acceptable salary ranges within industries though. Those keep people from paying themselves 50k in salary and taking 250k in dividends.
Good information Brian. I think I may be asking my question poorly though. If someone is going to receive $X in social security income when they reach the age to be eligible does the salary/dividend split work to reduce the wages used in calculating the benefit they will receive.
Clear as mud?
Brian, your social security benefit at retirement is based on earned income over the individuals lifetime. Self employment income and wages will be considered. Dividends are not included.
Periodically you should review the earnings and self employment wages reported to the SSA. I have client with W-2 earnings that didn't get added in because the employer failed to report the employment taxes.
So if someone is receiving $1k/month based on income earned over their lifetime and later decides to run a business and minimize their income to continue to draw this benefit does the salary/dividend split work?
-Income at retirement from social security is $12k annually
-Money earned from real estate business is $60k
-The $60k is split into $40k in dividends and $20k in income
Does the IRS use the $60k earned or $20k when they decide how much to adjust the social security benefit of $12k annually?
Assuming that the split works a follow-up question is....how is the adjustment made? Is it dollar for dollar or is there some table or sliding scale?
The earned income of 20K would be used. You may run into other problems though because this split may get challenged by the IRS.
Your answer is simple, Brian. If your structure your payments, salary vs. dividends, to minimize the amount of self employment taxes you pay, then you are also minimizing the amount of social security you will be paid when you start collecting it. The two are tied together.
IMO, it's a mistake to reduce the amount in the last 8 quarters prior to your retirement as that is a basis for your SS payment. Even if you do not earn enough to max your last 8 quarters, you can pay in the additional amount. It increases your SS for the rest of your life, so the goal should not be to avoid it....not a bad deal if your are in good health.
Updated almost 8 years ago
My CPA told me this about the last 8 quarters, other comments over the years I'm sure also apply, but you can top off your account making up the amounts in the last 8 qrts, to receive tham max benefit. According to what I was told....
Ah, got it now. The answer to your question also depends partly on when the individual starts receiving benefits. Right now, full SSI benefits are reached at age 66. The benefits are based on the average of your 30 highest earned income years, I believe. Once you hit full retirement, I don't think it matters what other income you make since your benefits won't be reduced. Taking benefits prior to 66 you end up with some type of reduced benefit until you get to full benefit age.
So long as you are setup as an LLC with an S-Corp election and so long as the split passes the reasonableness test, its only the salary amount. Dividends do not count. With LLC taxed like a partnership, all income is income as subject to social security tax. Also, you are only taxed for social security for the up to $106,800.
I believe they take an average of the highest 35 years of earnings so, yes taking less as salary will decrease your benefits at retirement (unless you already have your highest 35 years)
I am talking about the income that my dad will make AFTER the social security payment is determined. He wants to continue working because he wants to keep his mind fresh. He doesn't want to work too hard though and is wondering how he can use an entity to increase the amount of income he can make without impacting his social security payment. From what I have read above I think that the dividend portion he takes won't impact this benefit.
Just to be sure....is this the case? Thanks for taking the time.
Hello-- Social Security is calculated Based on Last FIVE years income only and not life time income. So to plan --if you are 60 years old --then take more salaries-- if any one is young -say in 40's - do not take any salary -- and do not have to pay FICA or other contiributions to medicare - state income tax etc- - or take minimum salary for basic home expenses -
Not sure --if Social Security will be available 20 years from now --so start setting up ROTH IRA --or have four or five houses --free and clear for retirement income.
I just want to put a note on here to clarify, When someone says LLC, they are note specifying the tax situation of the business.
An LLC can be a:
sole proprietor (all of his income is subject to SS and medicare up to the limits)
Partnership: All passed through income is subject to SS and medicare unless limited partner who does not participate
C-Corporation: corporation pays it own tax bill and
S-Corporation Corporation must pay a reasonable Salary to officers(subject to SS and Medicare) and other income is passed through as ordinary income with no special treatment only subject to income tax
Bryan, Your dad will still receive his SS payments no matter what his income is. The difference is that he will have to pay Federal income tax on up to 85% of his SS benefits. Dividends will affect this as well as any pensions received.
This article here will give you a quick general way to calculate how much is taxable.
See SSA Publication No. 05-10070, I don't think it is based upon the last 5 years only.
He will likely be setting up a LLC that he elects to have taxed as a s-corp. I'll check out the publications you referenced.
Follow-up question....What if he makes money and leaves it in the company's coffers instead of taking a salary or a dividend? Will this still be subject to federal taxation on up to 85% of his social security benefits?
Bryan, There is no option to do that with an S-Corp. The income passes to him because ALL of the income must go somewhere as the corp itself does not pay income tax.
He will pay tax on it whether he receives it or not.
After reading though the articles I think Steven's argument is correct. It doesn't make any sense to me why a s-corp shields FICA taxes in this instance and does not shield income for this purpose.
Does anyone want to take a stab at that line of reasoning?
If I understand your question, you really want to know how much money your Dad can EARN before his Social Security benefit is reduced.
You have received quite a few incorrect responses from misinformed but certainly well-meaning posters.
If your Dad decides to go back to work before full retirement age, but has already started collecting Social Security, his SS monthly benefit will be temporarily reduced by income earned in retirement.
For the purposes of computing the SS reduction, only wages earned by working outside the home or on a part-time basis from home count as income. You don't have to include any government or military benefits, investment earnings, interest, pensions, annuities, or capital gains when calculating retirement income.
In 2011, if your Dad is between 62 and the year he reaches full retirement age, he will have $1 of benefits withheld by Social Security for every $2 earned in excess of $14,160. This allowable earnings threshold is adjusted each year by Social Security based on a formula managed by Social Security called the national wage index. The new threshold information is released in the month of October, prior to the year it will be in force.
During the year your Dad reaches his full retirement age, he will only have $1 of Social Security benefits withheld for every $3 earned above the allowable earnings threshold until the month he reaches full retirement age. The allowable earnings threshold is $37,680 for 2011 and will be adjusted each year by Social Security's national wage index.
Once your Dad reaches full retirement age, there is no limit on earnings and no reduction in his Social Security benefit.
Thanks a bunch Dave! That is exactly what I was looking for with my original post.
So if I understand it correctly...he will have his benefit reduced AND be subject to taxation for social security dollars. Is that correct?
What is "full retirement age" in your explanation above? Is this related to social security definitions somehow? Is there a IRS publication for this that I can check out?
Also...will an entity help to reduce this "income" for the purposes of this reduced benefit prior to "full retirement age?"
I wouldn't be concerned about exceeding the income limit since the excess goes back into his retirement calculation and increases his benefit when he reaches full retirement age.
His full age is probably 66 when he can earn as much as he wants and collect his full benefit.
I checked and his full retirement age is 66.
So does working in the years between when he can start collecting benefits and when he reaches "full retirement age" decrease his benefit somehow if he earns less than he did prior to drawing social security?
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