This one goes out to all you small business owners out there. We are gearing up for tax season and your CPA is likely giving you the following advice:
Report as little income to yourself as possible to avoid self- employment and income taxes.
Of course, that advice has some merit. Who doesn’t want a smaller annual tax bill? However, your retired self might wish you had made different choices. Here are two reasons why.
Your Social Security benefits will be smaller. Social Security benefits in retirement are determined by the amount you paid in. Contrary to popular belief, it’s not 10 years’ worth of earnings that calculates your benefits (that’s just the minimum you need to pay into the system to get ANY benefit out). The Social Security retirement benefit you get is figured off your highest 35 years of earnings. So, if you are depressing you earnings now, you will get less in retirement.
Your retirement nest egg could be smaller. Most small business retirement accounts use your net income or reported salary to calculate the amount you can contribute. The lower your net income, the lower your savings rate, the smaller your nest egg. Just in case Facebook doesn’t buy your business for $1billion, you need to be saving as much as possible for retirement.
So, as hard as it is to resist paying that ultra-low income tax bill today, consider your future self when doing your tax filing. That old geezer will thank you.
