What's Best For Mom In A Mom-And-Pop Business?

In the latest edition of his column, “Social Security and You,” Tom Margenau explains how women who work in “Mom-and-Pop” businesses often get left behind when it comes to Social Security:

Q: My wife and I are in our 30s. We’re partners in a business that nets us about $80,000 per year. What’s the best way to report our income on our tax returns to maximize our Social Security benefits?

A: Even though you’re asking about your future Social Security benefits, I don’t like giving tax advice because I’m definitely not a tax expert. So your question really should be directed to a tax advisor or to someone at the Internal Revenue Service. But before you do that, I can give you some food for thought that comes from a potential Social-Security-benefit perspective.

I’ll offer you a couple of examples that show how your Social Security benefits might play out, depending on how you report your business income to the IRS. Please bear in mind that the numbers I give in the examples (especially the benefit projections) are really generalizations. But at least they’ll give you an idea of what I’m talking about.

PLAN A: You split the business income equally between you and your wife.

If you do indeed have a partnership and you and your wife are participating equally in the business, I believe this is the proper way to handle your taxes. In other words, both you and your wife would claim half (or $40,000 each) of your $80,000 net profit. The Social Security part of a self-employment tax return is called the Schedule SE. Each of you would file a Schedule SE reporting $40,000 to your respective Social Security accounts.

That means that when you hit retirement age, both you and your wife should have roughly equal Social Security retirement benefits. (Of course, your actual benefit amounts could be impacted by other variables, such as your dates of birth and any other income each of you might have before or after your business venture.) But for the purposes of my example, I’m just going to assume you’re about the same age and your non-business incomes are about equal. So let’s just say, using today’s dollars, that you end up with $1,500 per month each in a Social Security retirement benefit. Your total Social Security income would be $3,000 per month.

PLAN B: You report all the business income on the Schedule SE under your name and your Social Security number.