Dear Rusty: I waited to sign up for Social Security until I turned 70 last month so I would qualify for the maximum benefit. I have been a pastor in a small church for the past 15 years and they did not deduct deductions so I paid quarterly on the advice of my accountant so I would have an amount built up when the time came for me to sign up for social fuse. I received my first SS payment in March for $ 1,757 after Medicare was deducted. I’ve been told that when you turn 70, you get the maximum SS benefit, but my accountant thought I could still pay quarterly to increase the $ 1,757. I will not pay more if it does not increase my amount (in addition to the cost of living increases), so what should I say to my accountant? He is waiting to hear from me before filling out my tax return. Signed: Curious priest
Dear Curious: By “pay quarterly” I assume that you mean that your earnings from the church are reported on IRS Form 1099 and that you pay quarterly income tax to the IRS to avoid a penalty when you file your annual tax. The primary reason for paying quarterly estimated taxes is to avoid an IRS fine – paying your taxes quarterly does not matter to Social Security because they will use your annual income (no matter when you pay IRS) to see if your performance must be increased. And whether your current income from the church will increase your social security benefit depends on your lifetime income history of paying into the social security program.
The social security benefit you now receive is based on your lifetime income history, specifically the 35 years during your lifetime that you had the highest earnings (adjusted for inflation). Social security always uses a 35-year period to calculate your benefit amount and selects the highest earning years among all your earning years. If you have less than a full 35 years of earnings, they will add enough “zero” years to make it 35 to calculate your benefit. What this means is that if you have less than 35 years of SS-covered earnings, your earnings now from the church will eliminate one of those “zero” earnings years, which would result in a small increase in your social security benefit. However, if you already have at least 35 years of SS-covered earnings, then your current earnings will only increase your SS benefit if your most recent earnings are more than any of those in the 35 inflation-adjusted years used to calculate your 70-year benefit. Social security will make the decision whether to pay quarterly estimated income tax to the IRS or not, and they will automatically increase your monthly benefit if your current annual earnings from the church require it.
How you pay the IRS will not take into account Social Security’s decision, but not paying estimated taxes on a quarterly basis can affect your total income tax liability for the tax year, which is what your accountant should be able to tell you. And if your tax return is filed as a self-employed taxpayer, you must pay into Social Security through self-employment taxes, whether you pay the IRS quarterly or not.
Russell Gloor is an Association of Mature American Citizens Certified Social Security Advisor. To submit a question, visit amacfoundation.org/programs/social-security-advisory or email [email protected].