Self-Employment Tax – Social Security: Decreasing Rate of Return for Middle and High Income Persons

We have all heard rumors about the need for reform of the social security system and its eventual inability to make benefit payments at current inflation-adjusted levels to future retirees. However, what if it could continue at current levels? Do I ever get the money back in full, from the social security tax paid by the employee? Do I get any return on full tax (from employer and employee?) If I do, what rate of return do I get? Is there a level of tax with reasonable expectations of profitability?

This article is the first in a series that will begin to address these questions. There are many factors that affect the profitability of social security payments at the individual level, so the answer will not be the same for two people. Some examples of these differences are very clear, for example, the life expectancy of the worker and the age at which an individual decides to retire. Other factors unique to the individual level that may be less apparent would be a spouse’s life expectancy, disability before retirement, spouses’ income, family maximums, and whether there are dependent children under the age of 18 at the time of death. of a worker.

Therefore, there are many unknowns and unique situations that people should know about and discuss with their tax and financial advisers. And the averages? The tax and social security system are established primarily to meet some of the basic needs of retirees and their families. So, at the lower income levels, the returns are generally “OK”. As earnings rise for the average worker over their lifetime, returns from higher income levels decline rapidly and for many result in negative marginal returns, even for people with a high life expectancy.

The Social Security Administration at shows the formula for tiers where benefit payments are reduced for each additional dollar of income. While there are multiple factors, the “primary insurance amount” formula may be the best illustration of these “flex points” or tiers. As you can see below, the benefits are dramatically higher (90% of income level) for the first $ 9,800 of annual income in today’s wages. The benefits are much lower for the next level (32% of the income level), from $ 9,800 to $ 59,000 and for salaries above $ 59,000, even the return on capital (taxes paid) is generally not probable (benefits received at 15% of income level up to maximum social security benefits.)

PIA formula
For a person who first becomes eligible for old-age insurance benefits or disability insurance benefits in 2014, or who dies in 2014 before being eligible for benefits, their PIA will be the sum of:
(a) 90 percent of the first $ 816 of your average indexed monthly income, plus
(b) 32 percent of your average indexed monthly income above $ 816 and up to $ 4,917, plus
(c) 15 percent of your average indexed monthly income greater than $ 4,917.

This information shows the cut-off points at which the rate of return decreases, but must be analyzed in aggregate over an individual’s working years, since social security formulas are based on averages. To the extent that you can limit your earned income versus non-earned income, small business owners and others can take advantage of this information to help them decide how much they should be working, rather than just having their business working for them. There are some frequently used tax strategies that can reduce the burden on the taxpayer. For business owners and some independent contractors, the ability to use tax strategies is greatly increased.

What does this tell me about the social security tax refunds I pay? What can I do about it? I will post part 2 of the article series detailing expected rates of return.

Circular 230 regulations require all attorneys and accountants to provide extensive disclosure when providing certain written tax communications to clients. We would like to inform you that since this document does not contain all of these disclosures, you cannot rely on any tax advice contained in this document to avoid tax penalties.

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