Why Those with Disabled Children May Not Want to Skimp on Social Security Taxes

If you’re a business owner, and the IRS hit you with a big tax bill this year, you might want to lower your future tax burden. Electing S Corp tax status as an LLC probably came up in your research. As an S Corp, you can issue yourself a salary and take the rest of your profits as distributions. You don’t have to pay FICA – Medicare and Social Security taxes – on distributions. That means you could theoretically shrink that check you have to write to the IRS. Be wary, though. Diminishing how much you pay into the system lowers your benefits later in life. If you have a disabled dependent, you’re going to want to pay extra attention. Lowering the amount of Social Security taxes you pay could cut the benefits they receive, too. Namely, the Disabled Adult Child benefit (DAC).

What is the Disabled Adult Child benefit?

The Disabled Adult Child benefit is a check your child can get if they were disabled before age 22 and don’t make “substantial earrings” as defined by the SSA. Substantial earnings are $1,550 monthly for most disabilities in 2024. This year, it is $2,590 if the person is blind.

Your child can collect these benefits once you start claiming your own Social Security benefits, whether that’s because you reach retirement age or because you start claiming Social Security Disability Insurance (SSDI) yourself. DAC pays out 50% of your own Primary Insurance Amount (PIA) to your child while you’re alive and will pay them 75% of that amount after you pass away. Your PIA is the amount you’d expect to receive from Social Security on a monthly basis after you reached retirement age.

What are the benefits of DAC?

DAC can pay significantly more than SSI, a program that provides financial assistance to disabled people or those older than 65. In 2024, the maximum SSI payment for an individual is $943 per month. DAC pays more if the parent’s (or other qualified family member’s) PIA is more than $1,866 at retirement age, or $1,257.34 after the parent dies.

Elizabeth Yoder, CFP and owner of Dependent Financial Planning, said there can be many benefits to DAC outside of a dollar-for-dollar comparison to SSI.

“One main consideration is the SSI asset rules don’t apply to SSDI’s DAC program, requiring less back and forth with the Social Security Administration,” Yoder said. “I know many families who would choose to file [for retirement] early just to be done with some pieces of their SSA communications.”

Yoder said another benefit to DAC is that once you’re on it for 24 months, you can apply for Medicare. Sometimes the health costs Medicare covers can make such a difference in your monthly budget that the parent may consider claiming their Social Security retirement benefits early to gain Medicare access for the disabled individual.

What rules do DAC recipients have to follow?

To receive government benefits, you have to accept certain restrictions on your daily life. Depending on the program, that could mean being disallowed from building any type of meaningful savings, agreeing to certain restrictions on your career over the long term, or even being effectively banned from marriage.

DAC recipients have their own nuanced set of rules. Certain circumstances allow them to get married or pretend like they got married without filing paperwork with the state. However, entering a disallowed legal marriage will get them kicked off DAC benefits for life. Even if there’s later a divorce, or they later become widowed.

While DAC does give you a nine-month “training” period to earn more than the year’s set monthly substantial income limit, those nine months do not have to be consecutive. Each month the disabled individual works over the substantial income limit will count toward the nine-month maximum. Experts don’t recommend flirting close to the edge, though. That is, unless the person is confident they will be able to maintain their career and state health insurance to the point where losing DAC is a non-issue for the course of their lifetime.

Yoder said one way to limit your own monthly income while maintaining a career on DAC is to venture into business ownership.

“Many individuals eligible for the DAC would benefit from being business owners, as they can exclude all of their business expenses from countable resources when they work under 45 hours a month,” she said. “Many individuals who will be on the DAC are considered for guardianship, but guardianship is not always the best fit. Someone under guardianship cannot own a business and cannot take advantage of this opportunity.”

What are other circumstances that would lower my FICA taxes?

Most of the circumstances that would allow you to lower your FICA burden (including Social Security taxes) are tied to self-employment. For example, if you have a SEP IRA, you can contribute up to 25% of your income per year, up to $69,000 in 2024. This can reduce your taxable income by a significant amount, but it also lowers your FICA tax base.

“Other self-employed parents may have the ability to under-report their income by retaining earnings in their businesses,” Yoder said. “To the extent that a self-employed parent can reduce their earned income below the Social Security wage base, we recommend that families adjust up vs. down to allow for higher lifetime benefits to their child with a disability.”

Is it better to pay FICA taxes or invest?

In most situations, it’s ideal to do both. It’s not so much an either/or situation so much as one that calls for balance. A certified financial professional with experience in disability finance issues can help you find that balance.

“Think of the child’s DAC as a lifetime pension income,” explains Yoder. “To the extent that we can guarantee any federal income payments, that will be there regardless of what is otherwise available through an inheritance.

“Parents’ own financial planning continues to be important to the security of the younger person. Projections should be reviewed to reassure a family that their lifestyle needs in retirement are met by the strategies they follow while working and when retired. This includes comparing tax and Social Security filing strategies.”

Will Social Security even be around for my child?

Even if your child is young and you have anxiety about the long-term funding of Social Security retirement programming, there’s less cause for concern when it comes to DAC and other disability benefits, according to Yoder.

“The most significant cuts that legislators are discussing are to standard retirement benefits,” she said. “The disability programs are in their own world. If anything, I see the federal legislators talking positively about expanding benefits for adults with disabilities.”

So, I shouldn’t restructure to an S Corp, then?

Anyone who reduces their Social Security contributions – whether through an S Corp or otherwise – should understand that less contributions mean less benefits down the line. This is particularly important to consider if you have a dependent who would qualify for the Disabled Adult Child benefit. However, tailor your tax strategy and business decisions to your situation with the help of a qualified professional.

“The income and resources of each DAC and disability recipient are unique,” Yoder said. “Their needs are unique, and the input they receive from their families vary greatly. So while general recommendations usually stay the same, everyone should be cautious on receiving generalized advice from friends and family, and advisors who have not looked at your individual financial, medical and personal goals.”

Pittsburgh-based writer Brynne Conroy is the founder of Femme Frugality and the author of “The Feminist Financial Handbook.” She is a regular contributor to The Penny Hoarder.