Social security taxes – the optional method

How paying social security taxes in years with losses can benefit farmers

Farmers may wish to consider paying social security taxes even in years with losses. They are usually glad if they don’t have to pay self-employment (SE) taxes (a.k.a. social security tax) when they have low or negative taxable earnings. However, there may be times when that is not a good strategy.

Paying SE taxes or social security and medicare taxes allows a taxpayer to be eligible for social security benefits including retirement and disability as well as hospitalization. If income is not enough in a tax year to earn quarters of coverage, farmers have an optional method to be used. For most full-time farmers this method could be used when net farm profits are very low or negative. By paying tax on an amount that is less than $5,000 with a payment of about $650, four quarters of eligibility could be earned. The amount paid increases slightly most years and is based on the SE tax required to earn the four quarters of coverage. Part or all of this cost might be returned in EIC (Earned Income Credit). There are some alternate rules in this method for very small farm operations with a farmer that has minimal gross income.

Generally, 40 quarters of credits must be earned to be eligible for retirement benefits. This might only be ten years of paying into social security although the monthly social security benefits are based on the highest 35 years of indexed earnings. Even if a farmer meets the minimum requirements for retirement benefits, additional quarters earned using this optional method might add more years and be worthwhile in later benefits. For younger farmers who have a long time until retirement, then qualifying for disability can be good planning. It generally takes 20 quarters in the last ten years to be eligible for benefits.

For many years the farm optional method did not allow a farmer to earn four quarters of credits. Legislation has changed that and although the required payment may increase slowly, it always permits a farmer to get those four quarters even in a loss year.

For more information contact Social Security, Internal Revenue Service, or your local tax professional.

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