You may wish to consider paying social security taxes even in years with losses, say Warren Schauer, Extension business management educator, and Larry Borton, TelFarm, both at Michigan State University.
“As a rule, farmers are usually glad if they don’t have to pay self-employment taxes (a.k.a. social security tax) when they have low or negative taxable earnings. However, there may be times when that is not a good strategy,” they note.
Paying self-employment taxes or social security and Medicare taxes makes a taxpayer eligible for social security benefits, including retirement and disability, as well as hospitalization. If income is not enough in a tax year to earn quarters of coverage, farmers have an optional method.
“For most full-time farmers this method could apply when net farm profits are very low or negative,” Schauer and Borton say. By paying tax on an amount that’s less than $5,000 with a payment of about $650, it would earn four quarters of eligibility. The amount paid increases slightly most years and is based on the self-employment tax required to earn four quarters of coverage. “Part or all of this cost might be returned in earned income credit,” the duo says.
Generally, you must earn 40 quarters of credits to be eligible for retirement benefits. This might only be 10 years of paying into social security although the monthly social security benefits are based on the highest 35 years of indexed earnings. “Even if a farmer meets the minimum requirements for retirement benefits, additional quarters earned using the optional method might add more years and be worthwhile in later benefits,” Schauer and Borton point out. “For younger farmers who have a long time until retirement, then qualifying for disability can be good planning.” It generally takes 20 quarters in the last 10 years to be eligible for benefits.
For many years the farm optional method did not allow a farmer to earn four quarters of credits. “Legislation has changed that and although the required payment may increase slowly, it always permits a farmer to get those four quarters even in a loss year,” they note.
For more information, check out the Social Security website at ssa.gov or contact your tax professional.