Fix the Tax Code Friday: SE Tax

It’s Fix the Tax Code Friday!

Over the last few days, there has been a lot of focus on Obama’s nominee for Secretary of the Treasury, Timothy Geithner, and his tax woes. Geithner’s tax problems still from the failure to pay self-employment taxes during his stint at the IMF. Critics on both sides have seized this opportunity to pounce on the self-employment tax (the FICA equivalent for those not subject to withholding) as potentially confusing and burdensome to the self-employed. Honest mistake or deliberate action – Geither’s omission has raised the profile of self-employment taxes.

So today’s Fix the Tax Code Friday question is:

Should self-employed persons be allowed to opt out of paying self employment tax (and thus, collecting Social Security benefits and the like)?

Comments

  1. Christopher Ganiere

    Yes. Social Security is a bad deal for most taxpayers. The more people that opt out the better. Note that Congress, federal government unions, and many state employee unions have opted out,

  2. Dave Lyons

    No. When they get to be old and dying and have used up the few retirement assets the vast majority of them have actually saved who will pay for their medical care (because they wouldn’t get Medicare) and subsidize their housing (again, because they haven’t saved enough for retirement)?

  3. Robert D Flach

    Kelly-

    My answer is yes – but only if “normal” W-2 employees were similarly able to “opt out” of Social Security. As long as one class of worker is required to participate it should be mandatory for all classes.

    I also support private Social Security accounts – not invested in the stock market, but in the money market or Treasury securities market.

    The self-employment tax calculation should be corrected to bring it in line with the treatment allowed a one-man corporation. In a one man corporation all employee benefits provided to the owner, like health insurance and pension contributions, reduce the owner’s salary. FICA tax is only assessed on the actual salary. With a self-employed individual, the SE tax is imposed on net profit of the business before deducting the self-employed health insurance premiums and pension contributions for the self-employed person and the ½ of SE tax.

    Owner health insurance premiums and pension contributions should be Schedule C deductions and not adjustments to income.

    TWTP

  4. bobguzzardi

    Yes, with clear written statement that the taxpayer will be responsible for his or her own retirement and with proof of non-cancellable retirement savings account with an amount contributed, at least, equal to FICA contribution. I support investment in stocks and bonds from a menu, like the one Federal Employees use.

    also, no reason to exempt W-2 employees

    Federal employees have opportunity for choosing their own retirement accounts.

    The government will probably inflate its way out of the Social Security bubble giving unsuspecting seniors less valuable dollars. The other options of increasing taxes or reducing benefits seems politically impossible. Since the government, through the Federal Reserve, operates a cartel of credit, currency and banking, and can determine the value of the dollar. This monopoly cartel does not seem to be working as well as it is supposed to.

    If you are smart enough to vote, you are smart enough to spend your own money.

  5. Goose The Tax Dog

    My gut reaction is “no”. So long as Social Security is a program that we want to continue on its initially contemplated merits (a big if, I know), allowing a portion of the workforce to opt out will create a significant adverse selection problem. Rational business owners who calculate that the present value of their lifetime contributions is greater than that of their expected benefits will opt out. Those whose benefits are expected to outweigh their contributions will opt in. Thus, the Social Security pool will be disproportionately represented by more “expensive” participants — a state of affairs that is unsustainable.

  6. Andrew

    I’ll agree with Robert, if someone gets to opt out of Social Security for the simple fact that they work for themselves, how is that fair to other workers? If I was able to opt out of S.S. and my employer took their 7.5% and matched my 7.5% into a 401k, then I’d be set for retirement. That 15% is going into S.S. to pay for current benefits right now and there’s no guarantee the program will be solvent when I retire.

    Shouldn’t S.S. really be considered a ponzi scheme? The people coming in last pay for the people receiving money, but you only get your money once the government says it’s ok.

  7. Derek

    I agree with everyone’s statements about equal treatment of all in regards to social security. But in a broader sense, I don’t think they should be able to opt out of the self employment tax.

    From my perspective taxes support every aspect of our govt. (police, fire, schools, etc). SE individuals are benefiting from ALL of the tax funded programs, so they should pay to support them.

  8. Melody

    When you think about it, Social Security actually does seem to be a ponzi scheme. I recognized that when I first started working and made sure that I saved for a comfortable retirement. Unfortunately, when you’re young and healthy, you may forget to consider, as I did, that a “comfortable retirement” would have to include a substantial amount ($1000 – $2000 per month right now) for health insurance premiums you’ll pay when you’re old and a little sickly, sans Medicare. Even something as controllable as late onset diabetes can put you into a high-risk insurance bracket at a time when you absolutely need health insurance coverage to keep a long hospital stay (or course of chemotherapy) from wiping out your retirement savings.

    Until we fix our healthcare problems in this country, I would have to say that no one employed in the private sector, including the self-employed, should be opting out of Social Security. It stinks, but it’s all we got.

  9. Pingback: SELF EMPLOYMENT TAX VS FICA TAX | The-Informer

  10. Another Tax Geek, CPA

    Nope, but social security should be revamped to be more like a cash balance pension plan. Much as I’d like to opt out and invest the funds myself, I’d be satisfied to receive, say, a T-bill rate of return and a guarantee to receive back all I pay in plus interest at the t-bill rate. That’d certainly beat the negative rate most of us under 50 are sure to see. Congress has no room to blame Madoff for anything as long as they and AARP keep perpetuating this ponzi scheme.

    There’s nothing complex about SE tax, anyone smart enough to generate a profit on Sch C can certainly figure out the SE tax. Geithner in particular has no excuse, and while I’d generally thought he was a good candidate prior to this, this is a pretty glaring error for someone in his position to have made. OTOH, I wouldn’t have paid up for the closed years.

  11. Skip

    So the IRS audited him, found some problems and he just “forgot” to tell them he did the same thing in previous years that the IRS didn’t find? While I know we don’t have to self incriminate ourselves and most of us would not be dumb enough to do that this is a rather special case – because this guy is going to be in charge of the agency that considers us all “stakeholders”. Stakeholders would act in the best interest of the other stakeholders, not necessarily in their own best interest. And this guy acted in his own best interest. This guy may have the best credentials in the world but with others running around, such as Larry Summers, why would we pick someone with these problems?

    As to opting out of SS – SS is not “like” a Ponzi scheme, it IS a Ponzi scheme. And just like Mr. Ponzi’s empire it will come crashing down. The primary difference is that Mr. Ponzi was just a day or so away from being able to pay everyone what they had coming to them – but the government “saved” the people from Mr. Ponzi by taking all the money. (It is very interesting and revealing to read the several books and articles about Mr. Ponzi.) SS however is not a day or so away from being able to pay everyone it owes – it will never, never, never, never be able to do so. And as more and more of us reach the magic age of 65 SS and Medicare will just go further in the hole until some future Congress has to bite the bullet. And in the meantime folks, such as some of those that contributed to this post are still looking off into the sunset worrying about 20-25 years down the road when they will retire and what their SS benefits will be. Folks, it won’t be here! Of course I probably won’t be either so if I am wrong so what? But the other side of the coin is this – if everyone who wanted to opt out of SS the government would go broke – or broker – and in a hellava hurry too. And probably 95% of those folks that opt out would not put up one dime for the future. So then the next generation (or perhaps the one after that) would be penniless and then they would need a “bailout”. We are being led down a rose pathway and when we get to the end we will not find the roses but we sure will find the thorns. But every month, right now, SS deposits money in my account, my housekeeper splits it among my kids retirement accounts so, in a way, at least the kids are being paid back what the government is taking from them every month from their paychecks. I just cannot figure out how the government can keep doing it. But as long as they do, what the heck, I’m happy about it and my kids are happy about it and their Mother would have been happy about it. Nah, she would have kept the money.

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