Updated social security basics for farmers
Legislation passed late last year extended some FICA tax provisions until the end of February.
Many farmers think of Social Security strictly in terms of retirement, unaware of the benefits available in situations of accidental sudden death or a long-term medical disability. The majority of farmers won’t have to take advantage of the disability or survivor portions of Social Security benefits, but all can profit from knowing exactly what the benefits are and considering them; along with other personal retirement resources, in planning for the future.
Your Social Security contributions basically consist of Federal Insurance Contributions Act (FICA) taxes, which earners pay the government in exchange for financial assistance in retirement and disability, survivor and Medicare benefits.
Most full-time farmers are self-employed and would pay FICA taxes amounting to 13.3% of their earnings. Of that 13.3%, the Social Security portion is 10.4%. The remaining 2.9% is for Medicare. The Social Security portion is paid on earnings up to $110,100 for 2012. There is no limit on the Medicare portion. Due to legislation passed late last year the 10.4% rate is only good through February 2012. Of course new legislation could change or extend the rate. If there are no legislative changes then it reverts back to 12.4%
If you’re a farm employee and receive a W-2 form each year, you pay 5.65% of your salary in FICA taxes through February, 2012. Your employer contributes 7.65% up to the maximum earnings limit of $110,100 in 2012.
If you earn more than $110,100 in 2012, you still pay Medicare taxes of 1.45% on all your earnings. But you don’t pay the 5.65% portion on any earnings beyond $110,100. Remember, however, that the maximum earnings limit goes up each year. Also the 5.65% rate is only good through February 2012 unless legislation extends or changes it.
If you’re considered contract labor and receive a 1099 at the end of the year, or if you’re self-employed as are most farmers, then you must pay the entire amount yourself. That amounts to 13.3% of your net self-employment income up to the $110,100 earnings limit through February, 2012. You also pay 2.90% (1.45% x 2) for Medicare on all earnings over the limit. Again this is subject to change if legislation extends or modifies the current rates. If no new legislation is enacted then rate reverts to 15.3% starting in March.
The reason for the larger amount for self-employed workers is that you’re responsible for the entire amount since you have no employer to match your contribution.
Your Social Security Statement:
Each year — about three months prior to your birthday — you should receive a Social Security statement at your home address (the address listed on your previous year’s tax return). The Social Security Administration is required by law to provide these statements to all workers 25 years and older who are not already receiving monthly Social Security benefits.
This four-page document lists your estimates of retirement, survivor and disability benefits. It’s also an easy way to ensure your earnings or self-employment income is accurately posted. It’s very important to check your earnings for accuracy since your eventual benefits are based on your lifetime earnings.
Confirming your numbers are accurate and is particularly important if you’ve worked for an operation that’s no longer in business due to bankruptcy. It’s not uncommon for an employee to have a year of missed earnings from a bankrupt operation.
In such a case, you need to provide your original W-2 from that year to ensure you are credited for those missing earnings, even though the company is no longer in business. Not all bankrupt operations fail to report earnings, but some do fail to pay all their FICA taxes.
Social Security uses your entire earnings record to determine your benefits. For full retirement-age workers, this is the formula:
First, your wages are indexed to current wage standards. Your 1975 earnings, for example, are probably considerably less than your income today. After indexing, they become much closer than you would think.
Then, the highest 40 years of an individual’s earnings are determined. Then the five lowest years of earnings are eliminated, leaving the highest 35 years to determine an individual’s level of benefits. This is divided by the number of months, to result in the average indexed monthly earnings.
Finally, this figure is applied to the formula specified by Congress to determine the monthly benefit amount, taking into account your age at retirement.
Upon receiving your Social Security statement, you and your spouse should review the benefits on your record. It isn’t uncommon for a married couple that has worked together in a family farm operation to file all the self-employment income under the husband’s Social Security number as a way to reduce tax obligations.
In such a case, the wife has worked for the farm business but was never paid a salary, leaving her with no earnings posted to her Social Security number. Without an earnings record, she’s ineligible for Social Security benefits based on her own earnings record, and she may only be eligible for widow’s benefits if the husband dies or spouse’s benefits when they both reach retirement age.
If a tragedy strikes, such as death or disability, your spouse needs to be aware of the family’s eligibility for Social Security benefits. The Social Security statements provide this information
For more information, log on to Social Security’s website or contact your local Social Security office.