Social Security for Farmers
According to the Social Security Administration, nine out of 10 Americans over 65 receive Social Security benefits, and for over half of them, it makes up more than half of their income.
It’s important to understand this benefit if you’re in a business without a pension plan, like farming. In fact, over 1 million of those receiving Social Security benefits are farmers.
First of all, to qualify for Social Security, you have to have either wages or net profit to earn credits. One credit is earned for each calendar quarter you have the minimum required wages or profit. If you don’t have at least 40 credits earned in the system, you'll get no Social Security retirement benefit (unless you are married to someone with enough credits or used to be married to that someone for at least 10 years.)
If your farm operation is an S-corporation or a C-corporation, you’re probably paying yourself some wages. That’s good. You get a credit for each quarter you pay yourself at least $1,300. If you are an LLC or Schedule F, you earn credits based on your farm net income. Profit in excess of $5,200 for the year gets you four credits. No profit yields, of course, no credits.
Getting to 40 credits makes you eligible for some benefits, but how much you’ll receive is based on the 35 highest years of earnings. Mathematically, this means that you keep adding to your benefits until you have worked at least 35 years. Also, if you are making more now than you did decades ago, you’ll keep improving your benefit as recent higher earning years are replacing the old McDonald’s wages from 1983.
If you spend your life as a Schedule F farmer, you will have to put up 35 years of profits in order to maximize your Social Security. What is the maximum benefit, and how do you get it? According to the Social Security administration, if you worked until age 70 and retired in 2016, the maximum benefit is $3,576 per month. You'll get that maximum benefit if you have been earning the maximum wages or profit that is subject to Social Security tax each year - $127,200 for 2017.
Most employees have 6.2% of Social Security tax and 1.45% of Medicare tax withheld from their pay, and their boss pays the other half. However, self-employed farmers get to pay both halves via something called self-employment tax, which is 15.3%. You do get to escape 12.4% of that 15.3% on any wages or profits you earn above the current $127,200 limit. The Medicare tax of 2.9% applies to every dollar, no matter how much you make. As you can see, getting the maximum monthly benefit takes a lot of years of work and a good bit of earnings.
Current estimates say that the Social Security Trust Fund will run out of money around 2034, and many people my age assume that there will be no Social Security benefits when they retire. My opinion is that Social Security will continue indefinitely at some level, but the portion of living expenses it will cover will continue to decline. I believe this will happen due to inflation and a decline in the number of workers supporting each retiree.
When the trust fund runs out of money, the government will have to increase Social Security tax, reduce benefits to retirees, or print more money and cause more inflation. As a result of the uncertainty of the purchasing power of future Social Security, I think it’s wise to supplement your retirement income with interest, dividends, cash rent, or some other income stream.