Paying Social Security in years of losses can benefit farmers

2011-07-21T00:00:00Z 2011-08-24T08:58:16Z Paying Social Security in years of losses can benefit farmersBY JANE FYKSEN, CROPS EDITOR Agri-View
July 21, 2011 12:00 am  • 

Whatever you believe with regards to its future, Social Security—at least for now—can provide some very real financial benefits.

While many farmers think of Social Security strictly in terms of retirement, they may be unaware of benefits available in situations of accidental sudden death or a long-term medical disability.

Farming is a dangerous occupation, carrying a higher risk for disabling—even fatal—accidents. While the majority of farmers (thank goodness) won’t have to take advantage of disability or survivor Social Security benefits, “all can profit from knowing exactly what the benefits are and considering them—along with other personal retirement resources—in planning for the future,” says Warren Schauer, business management educator for Michigan State University. Schauer, based in Escanaba in Michigan’s Upper Peninsula, is a Wisconsin native who grew up on a farm east of Spencer, where his father also worked as an ag mechanic.

Schauer says producers’ (or anyone paying into the Social Security system) contributions consist of FICA (Federal Insurance Contributions Act) taxes that earners pay the government in exchange for financial assistance in retirement, as well as disability, survivor and Medicare benefits. (Go online to Self-employed farmers pay FICA taxes amounting to 13.3 percent of earnings, of which the Social Security portion is 10.4 percent, the remaining 2.9 percent for Medicare. The Social Security portion is paid on earnings up to $106,800 for 2011. (There’s no limit on the Medicare portion.) Schauer notes the 10.4 percent rate is only for this year.

Farm employees receive W-2 forms. For 2011, they pay 5.65 percent of their salary in FICA taxes, with the employer contributing 7.65 percent, up to the $106,800 maximum earnings limit for 2011.

“If you earn more than $106,800 in 2011, you still pay Medicare taxes of 1.45 percent on all your earnings. But you don’t pay the 5.65 percent portion on any earnings beyond $106,800. Remember, however, that the maximum earnings limit goes up each year. Also the 5.65 percent rate is only for 2011,” he notes.

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 percent of your net self-employment income up to the $106,800 earnings limit. You also pay 2.9 percent (1.45 percent times 2) for Medicare on all earnings over the limit. “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,” he points out.

Schauer tells Agri-View that if there’s one error farmers make when it comes to Social Security, it’s not employing “the optional method” and still paying in even in years when they show a “loss.”

Schauer, along with Larry Borton with MSU TelFarm, a farm accounting system, say producers are usually glad if they don’t have to pay self-employment (SE) taxes (i.e. Social Security tax) when they have low or negative taxable earnings. However, they also think there may be times when that’s not a good strategy. Producers may wish to consider paying Social Security taxes even in years with losses, they advise.

Paying SE taxes or Social Security and Medicare taxes allows the producer/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 they can use.

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, Schauer and Borton note.

Generally, 40 quarters of credits must be earned to be eligible for retirement benefits. This might only be 10 years of paying into Social Security, although 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 producers who have a long time until retirement, qualifying for disability can be good planning. It generally takes 20 quarters in the last 10 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.

Noting to the fact that farming is literally risky business, a producer doesn’t want to discover down the road that he doesn’t have enough quarters of payments and doesn’t have the Social Security safety net in the event of a disabling injury.


Each year—about three months prior to your birthday—you should receive a Social Security statement at your home address (i.e. the address listed on your previous year’s tax return). Social Security by law has to provide these statements to all workers 25 and older who aren’t already receiving monthly Social Security benefits. This four-page document lists 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,” Schauer says.

Social Security uses your entire earnings record to determine benefits. For full retirement-age workers, this is the formula:

• Wages are indexed to current wage standards. (Your earnings 10 years ago, for instance, are probably less than your income today.) “After indexing, they become much closer than you would think,” he notes.

• The highest 40 years of your earnings are determined, and the five lowest years of earnings are eliminated, leaving the highest 35 years to determine your level of benefits. This is divided by the number of months, to result in the average indexed monthly earnings.

• This figure is applied to the formula specified by Congress to determine the monthly benefit amount, taking into account your age at retirement.

“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,” Schauer warns.

“If a tragedy strikes, such as death or disability, your spouse needs to be aware of the family’s eligibility for Social Security benefits,” he tells farmers. “The Social Security statements provide this information.”


What would happen if you aren’t able—either by accident or medical condition—to perform even the “indoor duties of managing your farm?” Schauer challenges. Under Social Security, a person is considered disabled if he can’t do work he did before and a medical condition doesn’t allow him to do other work. Such a disability must be expected to last for at least 12 months or to result in death; Social Security doesn’t pay any short-term disability benefits. Once benefits begin, they continue for as long as the worker is disabled and can’t work. The average monthly payment to a disabled worker is $1,057. For a disabled worker with a spouse and one or more children, the average payment is $1,585. After receiving disability payments for two years, the worker becomes eligible for Medicare.

Survivor benefits are monthly benefits paid continuously to a deceased worker’s family. Survivor benefits for an average deceased wage earner who leaves a spouse and two children is equivalent to a $403,000 life insurance policy. The difference is that the Social Security benefits are paid monthly, not in a lump sum. The average monthly payment for a surviving spouse with two children is $1,747. The payments increase based on an annual cost-of-living index, which is something few private insurance plans offer.

Children age 18 or younger (or 19 but still in high school) are eligible for survivor benefits. “So can a child who is 18 or older but becomes disabled before age 22,” Schauer adds.

A surviving spouse who is disabled or caring for children under age 16 (or adult children who were disabled before age 22) may receive benefits depending on his or her income from wages or self-employment. The surviving spouse—age 60 or older, or 50 or older and disabled—may also receive benefits, he concludes.

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