Social security and family Child care

Social Security and Family Child Care

By Tom Copeland. Posted with permission.

Family child care providers have a special interest in the future of Social Security. With all of the recent political discussion about how to reform Social Security, many child care providers are not aware of how this program works.

You qualify for Social Security benefits by paying 13.3% Social Security taxes on your business profit. (The amount was recently lowered from 15.3%.)

If you hire employees you pay 7.65% of the employee's salary out of your own pocket and withhold 5.65% from the employee's paycheck.

To receive Social Security benefits, you must pay Social Security taxes for at least 10 working years.

You will only pay Social Security taxes if your profit is more than $400 in a year. If you make less profit than this you may want to drop some deductions to show a profit of more than $400. This will allow you to count that year as one of your 10 qualifying years needed to receive Social Security benefits.

You can retire at age 62 and receive partial Social Security tax benefits, or wait until your full retirement age (age 65 - 67, depending on your date of birth) and receive full benefits. Visit theSocial Security website for more information.

I have advised providers for years to claim all the allowable deductions to reduce their tax burden. If you have been working as a provider for many years, or plan to work in the field for many years, you should be aware of the consequences of showing a smaller business profit each year.

Since the amount you receive from Social Security is based on the amount of Social Security tax you pay into Social Security, by claiming your maximum business deductions you may receive fewer benefits.

Over the year child care providers have asked me if it’s a good idea to forego some business deductions, show a higher profit, and thus generate a higher Social Security payout.

I don’t believe this is a good idea. It’s not clear that increasing your profit by a few thousand dollars each year until retirement will make any real difference in your Social Security benefits. There are too many variables affecting your benefits (your age, year you start claiming benefits, amount of your income, family status, etc.) to make any generalizations.

You can, however, get a reasonable estimate of your Social Security benefits by using the Retirement Estimator on the Social Security website. Here you can see the effect on your Social Security benefits of showing a higher or lower profit each year until your retirement.

My advice is claim all your business deductions and use some of your tax savings to invest in your own IRA. Doing so can offset reduced Social Security benefits.

Image credit: money.howstuffworks.com

For more information about Social Security, see my book Family Child Care Money Management and Retirement Guide.

Posted by Tom Copeland at 09:33 AM in Money Management & Retirement | Permalink
www.tomcopelandblog.com

Do you qualify to receive social security benefits?

Do You Qualify to Receive Social Security Benefits?

By Tom Copeland. Published with permission.

Family child care providers work very long hours each year and look forward to the day when they can receive Social Security benefits.

But, before you can receive these benefits you must first qualify to receive them.

You must work and pay Social Security taxes for at least ten years before you will quality to receive Social Security benefits.

You don't have to work these years consecutively and they can be a combination of years working as a family child care provider and as an employee for another business.

To pay Social Security taxes you must earn a profit of at least $400 in a year. If you have a business loss or a profit of less than $400, you won't owe Social Security taxes for that year and the year won't count towards the ten-year goal.

In a survey I did for my book Family Child Care Money Management and Retirement Guide 16% of family child care providers did not have a profit large enough to qualify for the work they did in the previous year.

To see if you have qualified to receive Social Security benefits, go to the Social Security website and look up your record of earnings or call 800-772-1213 . If you are age 60 or older you should be receiving an annual statement that will tell you if you do qualify.

If you do earn more than $400 profit, you should be filing IRS Form Schedule SE Self Employment Tax with your annual tax return. This form will calculate the amount you owe in Social Security taxes. The amount is then transferred onto your IRS Form 1040 and added to the federal income taxes you owe. You do not write a separate check to the Social Security office. Check your own past tax records to see that you properly filed IRS Form Schedule SE.

If your profit is slightly below $400 and you have not yet qualified to receive Social Security benefits, it is a good idea to reduce some expenses to show a higher profit and qualify for that year.

It may seem strange to hear me say not to claim a business deduction! Claiming all allowable business deductions is a message I've been preaching for many years. However, making sure you qualify to receive Social Security benefits is one exception to this rule.

Image credit: money.howstuffworks.com

For more information about Social Security, see my book Family Child Care Money Management and Retirement Guide.

Posted by Tom Copeland at 05:44 PM in Money Management & Retirement | Permalink
www.tomcopelandblog.com