04/20/2020
Most of the Sub S business owners we see are making a big mistake minimizing their earned income to maximize the profits passed out on a K-1 just to escape the 15.3% self-employment tax. The mistake is the failure to build a wage base used to calculate future Social Security benefits at retirement, which is a 35-year wage lookback. For example, if the owner reports a wage of 50k and profits of 100k over a 35-year period, the owner can only collect $1,350 in SS benefits at 67yrs old for the rest of his/her life. If 132k is reported on a W2, future SS payments jump to $3,300 per month. The Pension value of the difference is approximately $700k: that amount of money would be needed to generate the difference in SS benefits. By reporting just 50k, the owner would save $12,546 per year in SE taxes, which is $439k over 35 years. Still, that is a loss of ~260k of retirement value. Not to mention that Social Security benefits go up with inflation every year, no pension plan does that. You can also raise the SS benefit by 7% a year if you delay drawing social Security at age 67 until 70, which is a 21% increase.
