Social Security and Family Child Care
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 15.3% Social Security taxes on your business profit.
If you hire employees you pay 7.65% of the employee's salary out of your own pocket and withhold 7.65% from the employee's paycheck.
To receive Social Security benefits, you must pay Social Security taxes for at least 10 working years and earn at least 40 working "credits" (one credit for each quarter of a working year).
You will only owe Social Security taxes if your profit is more than $400 in a year. But you must earn a profit of at least $1,470 each quarter (or $5,880 a year - 2021 rate) to earn a working credit.
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 the Social 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.
Tom Copeland - www.tomcopelandblog.comImage credit: https://www.flickr.com/photos/86530412@N02/8224573137
For more information about Social Security, see my book Family Child Care Money Management and Retirement Guide.
