Summer and road trips go together like fried chicken and milk gravy. (I sure wish I could cook these as well as my receptionist, Carole.)
As I put together plans for a summer road trip with a friend, I realize it has been quite a while since I have seen one of the white on black billboards with short messages signed, “God.” You know the ones—looming, bold, text messages attributed to a wiser, higher power. They were prevalent a few years ago in this area. I think the last one I saw was on my road trip through Missouri into Arkansas last spring.
If I could put together a series of billboard messages to educate citizens about Social Security benefits, the first message I would post would be:
"Pay Self Employment Taxes."
Hundreds of people call my office every year after they have filed a claim for Social Security Disability Insurance benefits and have been informed that they are not eligible for benefits. My staff and I do our best to explain how that could happen when the person has worked all his or her life. The bottom line is, they did not pay self-employment taxes, so they are not “insured” in the Social Security Retirement, Survivor, Disability Insurance system.
Southern Illinois is blessed with small business owners and self-employed individuals. They are a stable, resourceful, resilient ingredient in the local economy: carpenters, mechanics, hair salon operators, personal caregivers, lawn care contractors, musicians, artists, and dog sitters, to name a few common examples.
These resourceful, self-reliant, self-employed individuals quite often handle their own tax returns. And they quite often make an enormous mistake: They confuse income taxes with self-employment taxes. They look at their net income from their enterprise, consider the number of members of their household, and conclude that they do not need to file a tax return because they do not owe any income taxes. Year after year, they do not pay self-employment taxes. When they reach retirement age or become disabled, they discover they have cheated themselves and their families out of income security.
Let us create a fictional self-employed individual—Fletcher. He is married, his wife has a good job, and they have two dependent children. He just turned 55. Fletcher has operated a small engine repair business out of his garage since he got out of high school, making about the same amount each year relative to the prevailing minimum wage. It works out great for the family because he can be home when the children are home and his weed eater always starts on the first pull. (Wouldn’t that be nice!) In 2014, he made $15,000.00, but, as usual, did not report the earnings on a tax return.
If Fletcher continues this pattern and this is his only source of income, at retirement age, he will have no Social Security Retirement income and no Medicare coverage because he has not paid self-employment taxes. He will not qualify for Supplemental Security Income at age 65 because of his wife’s income and their joint assets.
If, prior to retirement age, Fletcher gets seriously injured or ill and files a Social Security Disability Insurance claim he will not be eligible for monthly Disability Insurance benefits or Medicare because he has not paid self-employment taxes.
If Fletcher had paid self-employment taxes, at age 67 he would receive $1,253.00 per month in Social Security Retirement benefits—for the rest of his life! He would qualify for Medicare at age 65. His spouse and disabled adult children could also receive a benefit in certain circumstances. He would also qualify for Social Security Disability Insurance benefits if he became disabled prior to his full retirement age.
If you are wondering what your retirement or disability benefit would be you can use the Social Security Administration’s quick calculator to project your retirement benefit at this website.
If you want a more accurate projection, you can set up a personal account and see your actual earnings record and benefit projections. here.
You may be asking, just how do self-employment taxes entitle a person to Social Security benefits? This Social Security brochure for Self-Employed individuals explains that a wage earner who pays self-employment tax is paying both the employer and employee share of the Social Security Tax (6.2% plus 6.2%) and Medicare Tax (1.45% plus 1.45%).
(There is a deduction from net income for the half of the taxes that the employer would have paid.)
You may also wonder how wage earners, whether self-employed or receiving a W2, get “insured” for Social Security Retirement, Survivor, and Disability benefits. Instead of paying premiums, a wage earner accumulates work credits by paying taxes on earnings. You can earn up to a maximum of 4 work credits each year. In 2015, you can receive one work credit for each $1,220 of earnings. You can find this information here.
To be “fully insured,” you need at least one work credit for each calendar year after you turned 21 and the earliest of the following:
- the year before you attain age 62,
- the year before you die, or
- the year before you become disabled.
The minimum number of QCs needed is 6. The maximum number needed is 40. Any year (all or part of a year) that was included in a period of disability is not included in determining the number of QCs you need.
To receive disability benefits, you must have 20 work credits in the 10 years leading up to the disabling event and be “fully insured.” That information is here.
As a basic rule of thumb, if you have always worked, but you stop working, you will remain insured for Disability Insurance benefits for about five full years after the year you stopped working.
There are special rules for young people (under 31) and people who have had a period of disability during their adult years.
What would this mean for Fletcher? Assuming his income in 2014 was $15,000.00, this sample form helps calculate his self-employment taxes. He should have paid $2,119.43 in self-employment taxes, but half of that amount would be deducted from his taxable income for income tax purposes. That ends up being less than $177.00 a month for income protection and Medicare coverage for Fletcher and his dependents in the event of disability, retirement, or death.
Why would anyone pass up that sort of income security AND commit tax fraud at the same time? I think the simplest answer is that people just do not know. That is why this is the first billboard I would construct.
Enjoy your summer road trips and let me know if you see any good billboards!
Here’s my favorite: