Being self-employed, I pay 15.3% Self-Employment tax. This tax is used
towards social security and is in addition to my normal federal and
state taxes. I am only 26 and view the social security program as
virtually a charity program that will no longer be around when I
retire. That said, it is difficult for me to donate $12,000 towards
this charity program come April 15th. Is there any legal way for me to
opt out of the Social Security system and/or to legally avoid paying
self-employment tax?

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Request for Question Clarification by richard-ga on 18 Mar 2005 17:30 PST

Hello
Will you accept an answer that explains why there is no legal way for
you to opt out?

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Request for Question Clarification by pafalafa-ga on 19 Mar 2005 06:46 PST

There do appear to be certain religious exemptions to paying social
security.  Are you prepared to take it as far as considering
converting?  If so, it might be possible to dredge up the relevant
information.

pafalafa-ga

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Request for Question Clarification by siliconsamurai-ga on 21 Mar 2005 04:35 PST

Would you like some details of how you can reduce your SS payments by
forming a corporation? (And some other benefits for a higher tax
bracket individual.)

This is entirely legal in most cases, just complicated.

You won't avoid it entirely but you can do things to reduce the cost.

Hi, thank you for submitting your question to Google Answers, I hope I
can provide the information you are seeking.

The more I look at your question and the other suggestions, the more I
see that I have the only real answer so I am going ahead with it.

You are self-employed and have a relatively high income so you are
almost certainly a candidate for incorporation.

The basic way you avoid some taxes in a corporate structure is by
shifting income to benefits. Things (such as health care) you would
normally have to pay for out of the money you have left over after
taxes are deducted from the corporate gross and are never taxed even
though you get the benefits.

Corporations can pay for some meals, business trips (and upgrades as
well as airline clubs), taxi or limo costs, computers, cell phones,
professional improvement training, classes, vehicles, health
insurance, medicine, gym memberships, gifts to clients or potential
clients, corporate ?retreats,? tax preperation (even for employees if
you set it up that way), even purchase real estate.

Those are all perfectly legitimate, even expected expenses for a
corporation. There are others which can trigger IRS problems but, as
long as you take the advice of a good small-business
corporate-oriented CPA, you should have no problems.

For example, you MUST hold at least one stockholder/board meeting each
year. You CAN hold it in your bedroom but how does Aspen or Hawaii
sound? There is no requirement that it be held at your corporate HQ
and they seldom are. The corporation would be required to pay
reasonable costs to hold the meeting.
 
You may be able to form a retirement program which would pay employees
(or a certain class of employees) a pension.

In fact, a corporation can always start other businesses to sop up extra cash.

In effect, forming a corporation CAN be another way of creating a
retirement program of your own. You put money into it and grow it over
the years.

It can also loan you money and lease certain items from you, including
office space (want to buy an office building? or even a house zoned
for small business?).

The point of doing all this is that it can move a large amount of the
money you would ordinarily get as straight income (and is therefore
subject to SS and other taxes) into expenses for the corporation.

You, or someone, will still have to take a reasonable salary and pay
the usual taxes on it, but you wouldn?t normally be paying
self-employment taxes since you would be an employee again. In some
circumstances you would even qualify for unemployment benefits.

Whether this is worth doing depends on both philosophical
considerations (is paying taxes fair?) as well as the basic
cost-benefit equation which affects every business situation.

It will cost something to form a corporation and something to keep it
running every year ? for example, doing this without consulting a
lawyer and without using a CPA to do your taxes every year would be a
bad idea.


Someone is certain to raise the double taxation problem. That simply
shows a misunderstanding of small business finance and the tax laws.

Ignore double taxation, ? that only applies to a corporation which
wants to sell stock on a listed exchange and which therefore wants to
show a profit and/or pay dividends.

Unlike other forms of doing business, a corporation is not required to
show a profit to prove it isn?t a hobby - not ever. Simply spend all
the money in the corporation before the end of the fiscal year and
lend the business more cash to keep it operating. The only taxes the
corporation will pay depend on which state you are in or which one you
decide to incorporate in and will normally just be a corporation fee
in disguise.

A corporation can also provide a significant degree of legal and
financial protection because, unless you do something which would
constitute actual fraud, the corporation is liable for its own
financial problems (it doesn?t affect your credit rating negatively)
and it is difficult to sue an individual corporate officer or employee
unless it is by other stock holders alleging mismanagement.

http://www.allbusiness.com/articles/2515-35-1798.html


Downside

It is only fair to look at the downside of forming a corporation, some
of which have already been covered.

Double taxation is not a problem if you know how to manage money.

In fact, you may find that leaving money in the corporation makes
sense tax-wise depending on your tax bracket. You don?t pay tax on the
money personally until or unless you get it paid out as salary or
taxable benefits. This is another aspect of forming a corporation as a
retirement vehicle.

You must follow regulations for operating a corporation. This includes
using an independent account in some instances, but the cost of
meeting all those rules are also corporate expenses.

You MUST get a seperate bank account for the corporation - checking only is fine.

A corporation does take some time and money to start and maintain;
Initial costs can be kept below $500 and ongoing costs can be under
$1,000 per year including CPA and other fees.

You should easily be able to recover those costs in your tax bracket.

Google search term: benefit of forming a corporation

Nolo is a great source of legal advice.

http://www.nolo.com/article.cfm/ObjectID/D557CF7D-3BAE-4550-93F37C97C455A2D4/catID/B491956E-A152-424B-A2342A5861B5EACF/111/182/241/ART/

You will find a comparative business format chart at
http://www.bizjump.com/Article/Benefits.htm

Notice that, except for being able to deduct business losses, C is the
best in most instances and definitely the best when it comes to saving
on taxes by deducting business expenses.

Other than doing something illegal, forming a religion, or something
similar which is far more complicated than simply forming a
corporation, this is your best bet for reducing all taxes, including
Social Security taxes.

Remember, a corporation in many states doesn?t require more than one officer.

Another good source of ideas is to buy the corporate edition of a
popular tax program such as TurboTax, they include lots of good
information. Just don?t plan on doing your own taxes, the IRS looks
very favorably on having a CPA?s signature at the bottom of that
corporate tax form.
 
Thank you again for turning to Google Answers for your research needs.
This is really your ONLY practical legal option.

I am the CEO of a small C corporation and have been operating for two
decades. We never hear from the State or IRS except on routine
quarterly and year-end matters.

This might be of interest to you:

http://www.answers.google.com/answers/threadview?id=408151

You're only 26 years old!  Wait until you've done this for 30 more years.

Oh, this one is easy.  Stop working.  You will not have to pay
federal, state, FICA, etc.  You will still have to pay sales tax when
you purchase taxable items with the money you have received from
begging on the streets.

According to the current climate, you're being very cruel to not want
to support our aging SS recipients. When it was 14 people to cover one
benefit, it was not so bad when one wanted to opt out... now it's
(according to the ads we see) three who pay for one.

<sarcasm>
How dare you force more people to come up with money that you refuse
to contribute? Don't you know you are selfish and stingey and
generally not a nice person to not be contributing to provide
entitlements to our senior citizens?

How dare you think about your own livelihood and providing for
yourself? That *stinks* of capitalism... You need to contribute so the
government can look out for you better than you can look out for
yourself.

The government promised to give you pennies on the dollars that you
contributed all your life. Be happy that you get anything. Oh, btw,
don't worry, 'cause we need to tax that, too.
</sarcasm>

Well as seeing as more than likley he will not get social security
when he becomes of age to actually recieve the benifits. So he may be
asking himself why is he paying in for something that he will never
get. And to the fact that they have incressed the age to retire now. I
myself ask why do i pay in if i will never recieve these benifits. Due
to bad goverment choices and greedy politicians. Yes by him not
wanting to pay in does effect those who recieve it now. But why does
he pay if he will never recieve these benifits himself.

There are some complex corporate possibilities, are you in a position
to form a C corporation?

I am not sure how accurate this is but it is suppose to tell you what
you would get back when you retire under Bush's new plan.

http://www.schumer.senate.gov/calc/

In addition to the option for minimizing social security that
siliconsamurai-ga identified, you may want to also explore the total
opt-out that is possible for religious exemptions, as I mentioned
earlier.  You can find information about it here:



http://www.ssa.gov/OP_Home/handbook/handbook.11/handbook-1130.html

Social Security Handbook


1130.3 Is an exemption available? 
Ministers, members, or practitioners who are conscientiously opposed
to, or because of religious principles are opposed to, the acceptance
of benefits based on their earnings from these services may elect to
be exempt from coverage by applying to IRS for an irrevocable
exemption.



Cheers,

pafalafa-ga

Some notes on that calulator that David1977 mentioned:

"The calculator assumes that your investments get a rate of return of
3 percent above inflation"
Inflation has been averaged 2.5% for many years.  To assume that the
average younger American will only get 5.5% on their retirement
investments is a horrible assumption considering government bonds
average that much and the stock market averages over 11%.

"The rate of return is also adjusted to reflect an annual
administrative cost of .3 percent"
So they are saying they base their assumptions on 5.2% annual
return... that's not only a bad assumption, it boarders on stupid.

"For simplicity's sake, this website assumes all workers will retire at age 65"
Another bad assumption.  Obviously, the later you retire the more time
your private accounts have to outperform the money sitting in social
security (that is doing almost nothing) and give you a greater income.
 Being as the full retirement age is already 67 for those born 1960
and later and that age will likely rise before young people retire,
this is yet another horrible assumption.

As you can see, the people fighting against personal accounts the
hardest are those making bad assumptions.  If you honestly do the math
(without horrible assumptions) and understand what these accounts will
do for both social security and for yourself then you'll welcome them
with open arms.

Joining a different religion and proving it to the IRS seems a bit
extreme, why not just move to the Kingdom of Monaco if such extreme
measures are more appropriate than simply forming a corporation and
keeping your current job?

Good point.  I just thought it would be helpful to have all options on
the table.  Didn't mean to ruffle any feathers, though.

paf

paf no problem, just adding my 2 cents and keeping it real for the client.

Incidentally, the entire 15.3% is not Social Security.

This amount is represented by two components; employee and employer,
each taxed at 7.65% (i.e. 7.65% x 2 = 15.3%).

Of the 7.65%, 6.2% is Social Security.  The remaining balance of 1.4%
is Medicare, which has no limit where the taxation stops (cap), unlike
social security. (i.e. $1,000,000 will create a $24,000 Medicare
liability).

So effectively, 2.4% out of the 15.3% is Medicare.