Buy Social Security Benefits

Filed in Tax, Savings by on December 8, 2010

Tax changes often have unintended results. The Obama – Republican deal, extending the Bush tax cuts, should pass. It has a 2% reduction in 2011 Social Security taxes. You should use this to buy Social Security benefits.

You can buy Social Security benefits anytime. Simply increase your salary. However, Social Security is not a good investment if you pay both the company and employee share and only consider retirement benefits. This all changes when you buy Social Security benefits for 2% less.

For those with S CORPORATION (or LLCs taxed as one), this can involve a paper transaction. Say your business earns $30,000 before salaries. This applies to any amount. With no officer salary (bad idea), you pay income tax on $30,000. However, declare a $100,000 salary (to buy Social Security benefits) and you still pay income tax only on $30,000. That is because your business now has a $70,000 loss ($30,000 minus $100,000). The $70,000 business loss offsets your $100,000 salary, on your personal tax return (net $30,000). Actually, you also deduct company payroll taxes, so your income goes down slightly. Remember, taxes have nothing to do with logic, so you can declare a $100,000+ salary though you make much less. There is a reasonable salary requirement, but Internal Revenue is very unlikely to question this. Social Security is even more unlikely to do so.

You can buy Social Security benefits, with a $100,000+ salary, even if you do not have the money to pay the salary. You (or we) simply create a payroll check that has $100,000 in gross. We then deduct $7,650 in Social Security and Medicare tax and any withholding tax. With no withholding tax, we then deduct $94,349 in Stockholder Loans, for a $1 net check!

Can you afford the $1, plus the $13,300 in payroll tax? That is your total extra cost, except for small unemployment and state taxes (unless you are in Florida or Nevada). The return on your 2011 buy Social Security benefits will be substantial. It is why 2011 will have the unintended result of being a peak salary year.

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