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Tax practitioners frequently attempt to reduce Social Security and Medicare tax payments for small business owners. However, future Social Security benefits are also reduced when Social Security income is reduced. A mathematical model of multi-period tax savings and the future benefit reductions is developed in this paper that shows how long it takes to recover the tax savings in the form of reduced Social Security benefits.
This research demonstrates that saving Social Security and Medicare tax is more beneficial to higher rather than lower income taxpayers. In addition, saving the tax is also more beneficial to single rather than married beneficiaries, early rather than later tax savers and retirees, and when there are higher rather than lower real returns and inflation rates. In some cases, the tax savings is never recovered and is thus advantageous to the taxpayer.