Social Security and Self-Employment Taxes

Should I pay myself a salary as a married blogger? The answer is it depends. Do I really want to pay more taxes?

Are you working for yourself after a career of working for others? We have a friend who calls this baby boomer career trend Retirepreneur. We’re technically pre-retirement, in our late fifties and not planning to claim Social Security anytime soon. We’re not ready to hang up our economic engagement or life of service to others. But everything is filtered through the lens of preparing for retirement.

Dan still has one foot in the employment market. He’s employed by a small college with good benefits.

Lori is working fulltime as Aging with Freedom’s co-owner and operator. Lori can choose whether to receive income as an owner or as salaried worker income. As owner, income is return on investment, including her sweat equity. As salary, it counts towards her Social Security, but only by paying substantially more in FICA taxes. So Lori asks, “should I pay myself as a married blogger”?

Should we pay Lori a salary through the LLC and pay Social Security taxes to add to her working years’ totals? Or simply take any business income as pass-through income through the LLC?

This is a common question for retirepreneurs. It’s our third act of life. We’re preparing for or in retirement. Still doing our own business. And still not in love with paying more taxes. But relying upon Social Security for at least part of our retirement income.

You are the Tax Strategist (and everything else)

In the new part-time gig economy of side hustles, consultants, and project-based work all the complexities of being an employer fall on the self-employed individual.

This is true regardless of whether the individual operates as a sole proprietor or encases the work inside a pass-through business entity like a limited liability company (LLC) or corporation with Subchapter S election. Subchapter S is a tax rule allowing a corporation to elect tax treatment more like a partnership. An LLC or Subchapter S corporation doesn’t pay any corporate income tax directly. Rather any income is paid at the individual shareholder or owner level as regular income. (The new 2017 tax reform act includes a new 20% credit for such pass-through entity tax income to encourage small business growth. See, Unexpected Income, Save Tax Reform Savings.)

So, while you’re busy trying to generate business and do the work you also have to play the role of your own Human Resources Department, Compliance Officer, and Tax Strategist. Or pay another consultant to play that role.

Mantra of the Self-Employed

Remember the mantra of the self-employed or small business owner. You don’t have to do everything, but you do have to see that everything gets done. There’s no one else that cares more about your money than you do. Easy to see why time is our scarcest resource.

So, should I pay myself a salary as a married blogger? Am I ready to pay FICA taxes?

15.3% for FICA Taxes

Oh, and remember if you are both the employee and the employer, i.e., self-employed, you pay both the employee’s share of Social Security and Medicare (or FICA) taxes and the employer’s share.  For Social Security, it is 6.2% by each, the employer and employee, or 12.4% for the self-employed. For Medicare it is 1.45% for each, or 2.9% for the self-employed. That means that for every dollar of self-employed income, you pay 15.3% in FICA taxes to fund Medicare and Social Security.

Should I pay myself a salary as a married blogger?

Should I pay myself a salary as a married blogger?

And What Do You Get in Return?

Your own Social Security benefits are a function of:

  • When you claim (early at age 62, full at age 65-68 depending, or late at age 70)
  • How many years you worked and paid FICA taxes (contributed to the system)
  • And how much you earned

It is a complex calculation. Only your highest paying thirty-five (35) years of income count. Only your first $127,200 of income is taxed in any single year.

Investopedia walks through the issue here. How Social Security Self-Employment Tax Works

Pay More Now to Get More Later?

What does Lori really want to know? It’s not just, should I pay myself a salary as a married blogger? The deeper question boils down to, is it worth paying more FICA taxes now by claiming self-employment income to increase future Social Security payments?

Turns out that is a hard question to answer.

Remember the mantra of the self-employed or small business owner. You don’t have to do everything, but you do have to see that everything gets done. There’s no one else that cares more about your money than you do.

Social Security Doesn’t Add Up

The primary reason is that Social Security is underfunded. Prior payments by baby boomers were spent by the government for other things. There is no lockbox or individual account. We don’t get back the dollars we invested in the Social Security System. We’ll get whatever dollars future workers pay into Social Security via FICA taxes.

This system worked well when there were six workers for every retiree. It may not work so well when there are only two workers per retiree.

Social Security is no longer actuarially sound. That’s another way of saying, the numbers don’t add up. The government has promised more in retirement benefits than it has income to pay for the benefits from FICA. Hence the elephant in the room. Entitlement Reform.

Entitlement Reform

The need to reform Social Security and Medicare (and Medicaid) is a given. The solutions are limited.

  • Reduce benefits or those eligible to receive benefits, including:
    • Delay eligible retirement age
    • Means test (do you really need Social Security if you’re Bill Gates?)
  • Increase tax rates or tax revenue (not necessarily the same thing), including:
    • FICA tax rate
    • Eliminate the FICA income cap (tax salaries above the current $127,200 cap the same flat rate of 15.3%)
  • Economic growth:
    • Grow the economy
    • Increase the number of working-age workers paying in through increased birthrates or immigration
    • Increase workers’ income and thus FICA tax revenues

The problem is we have no idea which strategy, if any, the government will choose. When all the choices are bad, inaction is also a likely outcome. Inaction eventually crashes the system.

Should I pay myself a salary as a married blogger?

Did Recent Tax Reform Help or Hurt?

Arguably, the recently enacted tax reform act pursues option three, growing the economy. It may make future entitlement reform easier. But there’s a lot of uncertainty and disagreement about the anticipated net effect on jobs, worker incomes, and tax revenues.

Who is right? Only time will tell.

If tax reform works as proponents promise, it grows the economy, worker incomes, and government tax receipts, closing the entitlement funding gap. Assuming tax revenues rise faster than entitlement spending.

If, however, tax reform works as critics fear, it will make the entitlement funding gap worse.

And there may be a difference between what works for society at the macro level and what works for Lori (or you) at the personal or micro level.

Uncertainty About Future Rules (and Income) versus More Income Today

We simply don’t know what the future rules will be.  We don’t know how the government will close the funding gap. Perhaps technology will intervene to dramatically reduce health care costs. Or maybe indecision will crash the economy. We haven’t figured out a way to solve the hell-in-a-handbasket outcome and still participate in the potential for a good outcome.

Maybe the future really is Ready Player One: A Novel.  This dystopian novel of the near future was our travel treat on Audible over the Christmas vacation. Great story, loaded with boomer and millennial cultural references. But the setting assumes we continue ignoring problems rather than solving them. Worth a read (or a listen).

We’re inclined to maximize income today (and minimize taxes) because we can’t count on the return from any level of FICA tax payment into the system today. Should I pay myself a salary as a married blogger? No. Lori can’t be sure of a fair return on those FICA taxes in the form of better Social Security payments in the future.

We can run discounted time value of money calculations. That is, we can figure out what a dollar of future income is worth today. But there are so many uncertainties in the variables of the calculation. It would just be a fancy spreadsheet. One of our business mantras is, “Don’t mistake the spreadsheet for reality.” We’ve all seen plenty of rosy financial projections that had no relation to the reality of the market or the business. Spreadsheets are all too often just another way to write fiction.


So, what if we paid Lori a salary of $30,000? That’s less than her expertise is worth in the market.

Lori earning a $30,000 self-employed salary would pay $4,950 in FICA taxes for 2017. Would she get that back?

What stream of income from increased Social Security benefits would return $4,950? An increase in Social Security benefits of $10 per month over 30 years yields a discounted future value of $4,966. This is assuming a 2% rate of return, Social Security’s approximate long-term history for annual benefit increases to adjust for inflation. Note that long-term consumer price index inflation rate is more like 3%. Social Security doesn’t keep pace with inflation. If it were an investment, it would be a poor investment.

Should I pay myself a salary as a married blogger?

So, the question is, do we think paying almost $5,000 in higher taxes today will yield thirty years of $10 a month more income? Given all the conditions on Social Security in current rules? And all the potential changes to Social Security? Do we really want to pay more taxes? No.

Our Conclusion may not be Yours

We reached the same conclusion as the Investopedia article’s advice by financial planner Kevin Michels, CFP®, with Medicus Wealth Planning in Draper, Utah. We decided it’s better to manage our own retirement rather than count on playing roulette with Social Security rules, current and the future unknown.

So, Lori chose owner income rather than getting any self-employment income for this year. FICA isn’t getting any money. Our owner, operator isn’t getting any work credit for Social Security this year. Producing Aging with Freedom is a sweat equity investment.

What are you doing about self-employment taxes versus pass-through business income? We’d love to hear how you are answering this same dilemma. How do you answer the question, “How should I pay myself as a married blogger?” (Or similar question in your small business.)

There are some people who should choose to pay the FICA tax. For instance, if you are still accumulating your minimum ten years (40 quarters) of work history? Pay the tax for the year of work history. It’s required to receive Social Security at all.

Here’s an article on calculating various Social Security “what if” scenarios to determine your own “estimated” benefits. Investment News — Testing Social Security What If Scenarios The Investment News article includes a link to the Social Security Administration’s Retirement Estimator. Social Security Retirement Estimator The Estimator requires you to have a Social Security online account and you must verify your identity. But once in, you can run multiple scenarios. You can answer the question, should I pay myself a salary as a married blogger?

Other Aging with Freedom articles on Social Security

How to Retire with Enough Money, and How to Know How What Enough Is? 

Glass Half Full Retirement – Contrarian View.