What If My Wife And I Operated A Subchapter S Corporation?

Oct 28 2016 - 9:45am

First of all Larry, I was amazed that you answered me so quickly when you have so many others that you reply to and wanted to thank you for the time and effort it took for you to answer me with excellent advice..........Certainly thinking of signing in to your site.......I just wanted to reply to your thread if possible as I contacted my accountant and found out some news..to refresh your memory....

UK born but been over here now for 22 years and my wife and I are both US and UK Citizens. Started a business all those years ago here in the States and I qualify for Medicare and full Social Security. In fact next year will be 65 and definitely will sign up for Medicare and might wait until 70 for SS.

Was given some very bad advice many years ago in as much as although my wife has worked by my side for all these years, she never paid any taxes whatsoever and on the face of it would not qualify for either of the above, which I am entitled to.

However was reading an article which states that if your spouse and myself operate a business together, she would be entitled to receive SS credits as a partner but needed to file a separate Schedule SE, even though we file a joint income tax return. Its been my stupidity in not reading up well beforehand or not really understanding Medicare and SS that I have left this so late but am hoping that my wife could indeed be able to claim on SS and Medicare, perhaps claiming on my earnings?
I am just totally ignorant on this subject.

Just not sure how to go about this as did indeed try online last year to get the ball rolling by filling out the forms on behalf of my wife and trying to claim for her but somehow ended up filling out a disability form which naturally they wrote back and said she didn't qualify.....

So is there a place I could go to in order to hire someone who specializes in this as in a SS Lawyer or could I indeed tackle this myself as I don't want to mess up again and this is obviously quite important to handle correctly as would save us a considerable amount of money with health insurance costs plus have an income coming in....

Thanks.....

Hi,

When a husband and wife run a joint business, they have the option of reporting all of the profits to one member of the couple as a sole-proprietorship, or they can form a partnership to split the profits. This is done via your tax returns, and the IRS relays what you report to the Social Security Administration. It sounds like you inadvertently chose the first route, with you as the sole proprietor.

Actually, and especially if your wife is about your age or younger, this may have been the better choice. Had you split the profits between you and your wife, you would undoubtedly be due a lower Social Security benefit rate. Probably substantially lower. And, since your benefit rate will be higher as a result of the reporting method you chose, your wife will be eligible for a higher spousal benefit rate, and a higher widow's benefit rate if you die first.

The only catch is that, since your wife is uninsured on her own record, she can't draw monthly Social Security benefits until you start drawing your benefits. However, since you are already over age 62, she will be able to receive Medicare coverage based on your record when she reaches age 65. If she is already age 65, she can file an application for Medicare benefits immediately by calling Social Security at 1-800-772-1213, or by walking into a Social Security office.

All of that said, it may still be possible for you to reverse course and ask Social Security to split your past business profits between your earnings record and your wife's earnings record. For more information on this process, refer to this reference from Social Security's program operations manual: https://secure.ssa.gov/apps10/poms.nsf/lnx/0301802334. As I stated, though, this may very well be a disadvantageous course of action. Unfortunately, there are too many variables involved for me to be able to give you advice on this option. And, I don't know if you could find an attorney with enough expertise to help you with this issue. In my experience, most of the attorneys advertising themselves as experts in Social Security matters mainly handle disability claims.

You may first want to consider running the maximization software available on this website. That will give you an analysis of your filing options based on your earnings as they were originally reported, and will include estimates of the amount of your wife's spousal benefits.

Best, Jerry

So, My Accountant who unfortunately just does not appear to have any knowledge related to SS matters in my circumstances and nor do others it would appear tells me that we are an S-Corporation (wife and I own 50% each) and your reply, which appeared to be good news, might only apply if I am either a sole proprietorship or partnership. Is this true and if so, how does it now affect us and does your answer dramatically change as the S-Corp does not pay tax but passes through to me and I only pay SS Tax on my payroll?

Hi,

That would certainly have changed part of my original answer. In order for a person to receive Social Security credits from a Subchapter S corporation, they must either receive wages, or self-employment income in the form of director's fees. And, of course, they must pay the appropriate Social Security taxes.

Some people use Subchapter S corporations as a means to avoid paying Social Security taxes. To do this, they report their income from the corporation as unearned dividends. The downside of that strategy is either lower, or no, Social Security benefits.

As far as I know, there are no available do-overs that would help your wife. The statute of limitations would permit you to amend your tax returns for the last 3 years, but not any further back than that. If there are any exceptions for which you may qualify, I'm not aware of them.

Remember, though, your wife should qualify for Medicare coverage at age 65 based on your work record. And, she should be eligible for monthly spousal benefits when you start drawing your Social Security benefits, and potentially widow's benefits in the event of your death. It's quite possible that the monthly rate payable to you and your wife from your account could total more than what you would have received individually had you split your earnings, so all is not necessarily lost.

Best, Jerry