Every year, everyone who works pays Social Security taxes. If you’re like most people, you probably see that money coming out of your paycheck week after week, month after month. As a paid employee of Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), this even applies to Buffett.
However, Buffett’s Social Security tax bill reflects some things that many people don’t realize about the Social Security system. Many critics have viewed these issues as grounds for reforming the way social security financing works. Below, we’ll take a look at exactly what Buffett’s Social Security tax bill looks like and what it means to you.
Just a humble CEO
Warren Buffett is the CEO of Berkshire Hathaway, but he doesn’t have the lavish salary that many big-name CEOs are pulling down. For decades, Buffett has received a salary of $ 100,000 for his work in the Berkshire Executive Suite. It’s not the token salary of $ 1 that some executives take, but it’s nowhere near what many think it’s worth.
At first glance, this move may seem wise from a social security fiscal perspective. $ 100,000 is below the current salary limit of $ 137,700 for 2020, so it would be reasonable to believe that Buffett only pays the 6.2% Social Security payroll tax on $ 100,000.
However, Buffett also receives other forms of compensation. Specifically, Berkshire typically reports around $ 275,000 to $ 300,000 in costs for personal and home security services for Buffett in its compensation disclosures. If these amounts are included in wages for Social Security payroll tax purposes, they would be more than enough to bring Buffett up to the limit of $ 137,700, meaning he would pay the maximum of $ 8,537.40 in 2020.
Even that amount may not seem like a lot for a billionaire. But social security payroll taxes are based on earned income, not interest, dividends, or other types of investment income. The only people who pay more than this amount of $ 8,537.40 are those who are self-employed – and even they are limited to paying double that amount, which reflects the total contributions of employees and employers who are paid to most workers.
A little more on the top at tax time
In addition to payroll taxes, Buffett is likely to pay income tax on Social Security benefits. Given his work history, it’s likely that Buffett would qualify for the maximum monthly Social Security benefit, which by the time he turned 70 was $ 1,752 a month. After adjusting for the cost of living, that monthly amount had grown to around $ 2,675 by 2020.
Buffett’s tax returns are not publicly available, but based on his salary, Buffett has enough income that he will likely have to include the maximum 85% of his benefits in his taxable income. Based on a maximum Social Security benefit, that would mean including 85% of $ 32,100 or $ 27,285 in benefits on her tax return. This would be taxed at Buffett’s regular tax rate, which could reach 37% and add an additional $ 10,095 to Oracle’s total Omaha tax.
Social security reform could happen
Interestingly, some recent suggestions for reform efforts might not get Buffett to pay more taxes. For example, a proposal by President-elect Joe Biden would subject salary income over $ 400,000 to Social Security tax. But even if you include the full amount of security services for 2019, the total of $ 375,000 wouldn’t let Buffett owe an extra dime on top of what he’s already paying.
Social Security is an essential part of the financial protection retirees need, but the program doesn’t always work the way you think it is. The fact that wealthy people have relatively low caps on what they pay into the system is something that many people are watching more closely.