Here’s How Good Tax Advice Can Wreck Business Owner’s Social Security Checks 

Paying more FICA income taxes in a given year than is strictly necessary is always bad, right? Not so fast … 

Small-business owners are generally counseled by certified public accountants to reduce their annual tax liability as much as possible, for example, by splitting income between salary and distributions, and utilizing tax-free expense reimbursements. Because business owners pay both the employer and employee portions of FICA taxes, these and other strategies can result in significant annual savings. The problem is that Social Security benefits are calculated based on FICA income, warned Marcia Mantell, a Social Security claiming expert and president of Mantell Retirement Consulting. She’s seen many business owners who spent decades minimizing FICA taxes get hit with an unpleasant surprise when they go to claim: checks that are half the anticipated size (or even less).  

“They can just get crushed by this dynamic,” Mantell told Retirement Upside. “If you’ve been fantastically successful and sell your business for $20 million, a smaller check isn’t a big deal. But that’s not the case for the vast majority of Main Street business owners. Social Security benefits are vital to their retirement security.” 

Small Checks, Big Regrets

That’s not to cast blame on small-business owners or their trusted CPAs, Mantell said. It’s more about reminding business owners that accountants have a very specific goal in mind during tax season. “What that translates to is CPAs finding all kinds of ways to keep income low this year,” Mantell said. “It feels great when you’re in your 30s or 40s running a business, but then you come see me in your 60s, and we find a big problem.”

Some key numbers: 

• The maximum amount of earnings subject to Social Security taxes is currently $184,500 (indexed). 
• A beneficiary with 35 years of earnings at or above the maximum taxable amount who retired at full retirement age this year would get about $4,100 a month. 

In Mantell’s experience, a lot of business owners compare these figures with the money their company generates, and they assume they’ll be near the maximum benefit. “It’s a real shock when I pull up their benefit amount and it’s closer to $2,000,” Mantell said. Hopefully, they’ve socked away some of those FICA tax savings over time, but that’s often not the case. “That is a crushing blow.”

Play Nice! Jeff Levine, a CPA and the chief planning officer at Focus Partners Wealth, is also familiar with this dynamic. He encouraged financial advisors to establish cordial and collaborative relationships with their clients’ accountants in order to avoid bad outcomes. “The financial planner and the CPA aren’t always going to see eye to eye, and that’s fine,” Levine said. “In cases where there are disagreements, keep it professional. Inform the client that you have a different point of view and move on.”