Senior Living



Social Security and You: Self-employed People 'Cook the Books'

Tom Margenau on

Most of us work for wages, and there isn't much we can do to avoid paying Social Security taxes on those earnings. But people who are self-employed can frequently "cook the books" to lessen their tax burden. (By the way, I totally understand that when self-employed people do pay Social Security taxes, they pay twice the rate of the rest of us. That's a topic for another column.) But today, I'm going to answer emails from readers who avoided paying Social Security taxes and are now suffering the consequences.

Q: My husband and I are self-employed. Quite a few years ago, we incorporated our business. We did this on the advice of our accountant who said we would pay less in taxes this way. In fact, for many years we paid no taxes at all. Recently, at age 58, I hurt my neck and back in a car accident. I filed for Social Security disability benefits and my claim was denied. They said I'm not insured. What does that mean? I have my 40 quarters from work I did before we started this business.

A: It means there are consequences to not paying taxes. There are two insured status requirements you must meet to get Social Security disability benefits. The first is that you must have at least 40 Social Security credits, often called quarters. You said you have that, which means you will get retirement benefits someday.

But the second half of the insured status rule for disability says you must have been working and paying Social Security taxes in recent years. Specifically, the law says that you need to have paid Social Security taxes in five of the last 10 years.

I just hope that you took some of that money you saved by not paying Social Security taxes and bought yourself a good disability insurance policy!

Q: My ex-husband and I had a small but successful bookstore for many years before we divorced. All the earnings from that business went on his Social Security record even though I did all the bookkeeping and payroll and other office duties. My ex is 61, but I am almost 65. I checked with Social Security and learned I am due nothing! And I'm sure my ex will one day get a big fat Social Security check. I think Social Security is cheating me. I plan to go back and refile our taxes.


A: Social Security isn't cheating you. Your ex-husband cheated you. Or possibly, you cheated yourself.

You said you did all the bookkeeping for the business. If that included the filing of tax returns, you should have done a better job of it. Or if someone did your taxes for you, you should have been asking some questions way back then.

The part of the tax return that assigns self-employment income for Social Security purposes is called the Schedule SE. What likely happened is that just one Schedule SE was completed annually, and that form had your husband's name and Social Security number on it. So all the income went on his Social Security record. But based on what you said, the income from the business should have been divided. There should have been two Schedule SE's prepared: one with his name and SSN and one with yours.

You might as well give up your plan to go back and file amended tax returns. To do so would require not only a lot of time and effort, but also would need your ex-husband's cooperation. And I'm sure that is never going to happen.


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