Social Security Basis

By Jason Watson, CPA
Posted Sunday, October 29, 2023

If you believe Social Security will remain funded by the time you retire, you might be short-changing yourself since your salary will be used to gauge future retirement benefits. Remember, K-1 income from your S Corp is not subjected to self-employment taxes and therefore will not count towards your Social Security benefits basis.

Conversely the tax money you save today can make excellent retirement investments which can counteract the loss in Social Security benefits. In other words, the savings in Social Security taxes today might exceed the loss in future Social Security benefits if those savings are invested correctly.

The maximum Social Security benefit for 2021 is $3,957 per month for those who delay until age 70, or $3,135 for those who start benefits at full retirement age (FRA). Our apologies for not updating this data in a while, yet it remains relevant.

Using SSA.gov’s calculator, at $60,000 in salary with an age of 50 your benefit would be $1,955 at age 67 in today’s dollars. A $100,000 salary would have a benefit of $2,675.

Social Security Wage Limit (2021)					142,800
Max Benefit Retiring at 67 Years Old					3,135
Max Benefit Retiring at 70 Years Old					3,957
			Retire at 67 years Old				Retire at 70 years Old
Salary	% of Max		Benefit	% of Max	Delta		Benefit	% of Max	Delta
20,000	14%		1,037	33%	19%		1,306	33%	19%
40,000	28%		1,496	48%	20%		1,897	48%	20%
60,000	42%		1,955	62%	20%		2,487	63%	21%
70,000	49%		2,185	70%	21%		2,782	70%	21%
80,000	56%		2,415	77%	21%		3,078	78%	22%
90,000	63%		2,567	82%	19%		3,227	82%	19%
100,000	70%		2,675	85%	15%		3,365	85%	15%
120,000	84%		2,890	92%	8%		3,642	92%	8%
142,800	100%		3,135	100%	0%		3,957	100%	0%

Whoa! Look at those deltas between salary and benefits right around $90,000 to $100,000 in salary. This would suggest that salaries above $90,000 have a steep diminishing return on increasing SSA benefits. Or, said differently, salaries below $90,000 have a good retirement benefit for your salary buck. Additionally, consider that paying $140,000 costs about $7,500 in additional taxes without a corresponding strong future benefit ($50,000 x 15.3%). We’ll explore this more in our chapter on reasonable shareholder salaries.

Of course, there are a ton of assumptions in terms of age and consistency of earnings, but the table above illustrates some interesting points. You can probably imagine that this gets tricky right quick. Can I parlay my self-employment tax savings into better retirement benefits than the Social Security Administration? Probably. Are SSA benefits going away? Probably not, but they might become means tested and restricted in other ways.

Here is a link to SSA’s online calculator-

wcginc.com/6115