Mom and Pop Businesses and Social Security

People line up outside of the Social Security Administration office in San Francisco, Calif., on Feb. 2, 2005. (Justin Sullivan/Getty Images)

More than a few husbands and wives are involved in some kind of mom-and-pop business. And over the years, I’ve learned that many of those moms get the short end of the stick when it comes to Social Security. Or more specifically, to the assignment of earnings from the business to Social Security records.

I don’t have any statistics to back this up, but if my emails are any indication, in the vast majority of cases, Pop gets all the earnings added to his account and Mom comes up with a blank slate. As I will explain in this column, that can sometimes actually end up working in Mom’s favor when it comes to eventual Social Security benefits. But many other times, Mom’s empty Social Security record means she will face problems down the road when she’s reaching her retirement years. I’ve saved up some emails that illustrate both sides of that conundrum.

Q: My husband and I run a small business. Our profits are modest but usually enough to reach the Social Security taxable maximum. We are both 65 and plan to file for Social Security next year when we reach full retirement age. We recently checked our Social Security accounts, and I was shocked to learn that the only earnings on my record are from when I was younger, before we started our business. Even though we filed joint tax returns, for some reason, all the company’s earnings went on my husband’s record, and none went on mine. What happened?

A: Filing a joint tax return has nothing to do with the assignment of the business earnings to your Social Security accounts. The Social Security part of a self-employment tax return is called the Schedule SE. This is the form that indicates whose Social Security number gets the credit for the business’s profits. And obviously, for all these years, the person who prepares your tax returns has been putting your husband’s name and your husband’s Social Security number on that Schedule SE.

On the one hand, you probably should feel cheated by that. If misery loves company, you may find some small amount of solace knowing that you are not alone. Over my almost 50 years of working on Social Security cases, I’ve heard from thousands of women in the same boat.

On the other hand, as I said at the beginning of this column, this questionable tax-filing practice may end up working out for you and your husband. Here’s why.

You said your business has usually paid taxes on maximum Social Security earnings. Because all those earnings went on your husband’s account, they are going to translate into a very high Social Security retirement benefit for him. Let’s say it will be $3,000 per month. So, at full retirement age, that’s what your husband will get. And because your Social Security record is empty (or almost empty), you will get a wife’s benefit equal to half of that rate, or $1,500. So, you will get combined benefits of $4,500 per month.

Had you split the profits all these years (by showing both your names and Social Security numbers on the Schedule SEs), with half the earnings going on your husband’s account and half on your account, your husband would have ended up with a smaller Social Security benefit, and you would have received your own Social Security benefit. I’m guessing you each would have ended up with benefits in the $1,800-per-month range, giving you combined benefits of $3,600 per month.

So, as you can see, at least from a Social Security benefit perspective, the way you filed your tax returns actually worked out for both of you. But the next email comes from a woman with a different story.

Q: I am 58 and recently married for a second time. My first husband and I ran a successful business for all the 25 years we were married. I thought that, because we filed joint tax returns, my ex and I were sharing the earnings from our business. But I just checked my Social Security account and see nothing but goose eggs on my record! I called the Social Security Administration, and they said there is nothing they can do about this. What can I do?

A: First of all, obviously, the same thing happened in your case. Only one Schedule SE was filed, and all the business earnings went on your ex’s Social Security account. But because you are divorced and married to husband No. 2, you are not due any benefits from your ex-husband’s Social Security account. Sadly, you are really coming out on the short end of the Social Security stick.

So, what can you do? Well, I am not a tax expert, but I think your only chance of correcting things would be to go back and file amended tax returns for the business. But there are two potential problems. First, I have no idea how far back you can go to file amended returns. Second, you would have to get your ex to agree to filing amended returns. And because that will result in lower Social Security benefits for him, my hunch is your chances of getting him to agree to that are somewhere between zero and none.

I hope your current husband has a good job and will end up with a decent Social Security check, because you will be due spousal benefits on his record. If he’s not well-off, here is some far-fetched advice. As you are pushing Social Security age, you could divorce your second husband and then turn around and collect divorced wives benefits from your first husband and at least get something for all those years you worked in the business.

Q: My husband and I are in our 30s and started a business last year. Our accountant wants to put all the earnings on my husband’s Social Security record. He said that will work out better for us. What do you think?

A: Well, if you’re going to stay married forever, then your accountant might be right. But if you’re not sure (half of all marriages end in divorce, after all), then consider the plight faced by the woman above.

And there is another piece to this puzzle. By having earnings posted to your own Social Security account, you would not only get retirement benefits someday but also qualify for monthly Social Security disability benefits if something happens to you—and that would be very valuable coverage for you and your family if that were to happen. Or if you die, your husband and kids would get survivors benefits on your account.

Tom Margenau worked for 32 years in a variety of positions for the Social Security Administration before retiring in 2005. He has served as the director of SSA’s public information office, the chief editor of more than 100 SSA publications, a deputy press officer and spokesman, and a speechwriter for the commissioner of Social Security. For 12 years, he also wrote Social Security columns for local newspapers. If you have a Social Security question, contact him at [email protected].