Podcast: Maximizing Social Security Benefits for Self-Employed Individuals

5 30 Podcast

Written by Jeff Dvorachek

May 30, 2024

Welcome to the Tax Insights Podcast, where we break down complex tax topics into bite-sized how-tos. In this episode of Tax Insights, Jeff Dvorachek provides clear guidance on how self-employed individuals can qualify for Social Security, from understanding contribution requirements to planning for a financially secure retirement.


In this episode of Tax Insights, Jeff sheds light on a common concern: Social Security for self-employed individuals. Transitioning from a W-2 employee to a business owner can bring uncertainty about how Social Security contributions work. Join us as Jeff explains the process, the impact of profits on contributions, and the importance of financial planning for a secure retirement. Let’s jump right in!

Host: We have a great conversation planned for today, and this actually stems from one of your clients reaching out and asking you guys this question, and we thought, you know what, this would be a great question for our listeners out there, and it’s all about social security, specifically, how do self-employed individuals qualify for social security?

Jeff: That’s right, so one of my clients had given me an email or a call this week, and they were asking because their daughter is now self-employed. She bought herself a business, and so she’s self-employed. She was a W-2 employee her whole life before this point. So, you know, as everybody knows, when you’re a W-2 employee, you pretty much pay social security and Medicare that gets taken right out of your paycheck, right?

Host: Correct, correct.

Jeff: But they were wondering, well, how does that work now that she’s self-employed?

Host: So, walk us through what is that process and or what do individual small businesses that are just self-employed? What do they have to do?

Jeff: Yeah, so self-employed individuals are things like farmers, people that do like a Schedule C on their personal return, and partnerships. Those three buckets are the main ways that you would have self-employment type income, and to figure out how much you have to pay into the social security system, it’s all based off of how much profits that you end up making on one of those businesses.

Host: Okay. Now, speaking of that, because I know sometimes there may be some tax benefits of not always showing a big profit, does that mean that they’re not paying much in on their social security on that part? Like, walk through how that works.

Jeff: That’s exactly how it works, Terry. You know, there are some businesses that over the years, they really haven’t had that much net income because they’re buying equipment, things like that.

Host: They’re reinvesting, they’re growing, they’re expanding. Therefore, there’s not a lot of net there, so are they not paying into social security?

Jeff: They are not. So, it’s kind of a short-term trade-off for a long-term trade-off. At that point, if your income from your business is low and you’re paying very low social security and self-employment taxes, you’re really not paying into the system. So, later on, when you retire, your benefit is going to be much lower than if your profits would have been higher all those years.

Host: So, that’s where I think a lot of this comes down to discipline and or making wise financial decisions right away because you’re not going to be getting a big social security at the end. Therefore, you need to start saving that money now for later.

Jeff: Well, and that’s just it. So, if you have a business that you keep reinvesting money into, so there isn’t a lot of profit, you know, your retirement plan really cannot be based around social security. It really should be based around what can I sell this business for when I’m ready to retire because that’s where my nest egg is going to come from.

Host: Yeah, absolutely. Good information, good reminders. I think this is why it is important for businesses whether you are large or you are self-employed, you really need to have a team of experts helping you and guiding you, making some wise decisions. And that’s what you guys do over at Hawkins-Ash.

Jeff: And that’s right, Terry, because, you know, the way I look at it, it’s not always about how much tax you have to pay or don’t have to pay this year. We got to look at the whole business lifestyle cycle because, you know, at the end of the day, what we’re all looking to do is retire, right?

Host: Absolutely. Jeff, good information. Time is running out. What is the best way for our listeners to reach out to Hawkins-Ash?

Jeff: I would go right to our website, which is HawkinsAsh.CPA Go to that CPA-HQ section.

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Jeff Dvorachek
As a partner, I have thorough experience providing tax services to individuals, privately held businesses, nonprofit entities and estates and trusts. I also provide compilation and review services.

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