Wrong, Thom Hartmann, the Wealthy Are Not Exempt From Social Security Taxes

NewsBusters.org ^ | July 4, 2016 | Jack Coleman

[Aliska]

If it was earned income, you are right. But some parlay unearned income gains into more tax-exampt gains and never pay social security or Medicare tax on it.

That isn't true across the board. A lot of wealthy did start out working for wages or were subject to SS and Medicare.

And some wealthy like Kerry, I assume but am not sure, have to pay SS and Medicare taxes on salary in their government job up to the annual limit.

[Gaffer]

Understand completely. However, most people don’t enjoy the luxury of totally derived “unearned income” throughout their lives. That is a small percentage really. Those that amass wealth like that ultimately don’t care about what, if any, earned income they get being taxed like that.

I think we’re on the same page, just different ways of looking at it. :0)

[Aliska]

True. I was trying to think of how one would have substantial wealth or even a comfortable living all their lives on unearned income.

I don't know if other forms of rental income, say invest in some kind of housing, would be considered unearned income. Maybe I should look it up.

I am not what I would call wealthy and it makes a huge difference of what kinds of income I'm taxed on. Some of that is unearned income which I pay income tax on but not SS or Medicare.

And I had some fun trading stocks a couple years back and all of what I made was taxed as short-term cap gains ordinary income. It had a negative impact on the rest of my tax situation, so it had a dampening effect unless I make huge amounts which I wasn't good enough at it to do. IOW it wasn't worth the hassle for no more than what I made.

[Gaffer]

I guess the only CERTAINTY I can fathom and know is that regardless of however you make your money, the government will find a way to take as much of it as they can from you.

Hopefully, you would also have the resources of a good lawyer and knowledgeable account to advise you but in the end, even in death, this government finds a way to f@ck you.

[MD Expat in PA]

I wouldn't be surprised if there is already software running in accountants offices that tells you how to maximize your social security returns by earning enough income subject to FICA - speaking fees, consulting fees, directorship fees, etc. so that you get the maximum payout, but not paying more than needed. The rest of the money moves into dividends, rents, etc….Attempts to raise money by increasing the FICA limit ultimately just burden people trying to move up using earned income. The increased limits won't tax people who are already rich whose income can be re-allocated to avoid the tax.

No sophisticated software is needed. There is an annual wage limit on wage or self-employment taxable income that is subject to SS tax (currently $118,500) and there is an annual monthly SS benefit maximum (currently $2,639/mo). If you were a high wage earner for all or most of you career and paid the max amount of SS on those subject earnings, you are still only going to get the max amount in benefits and if you have other income either through a private retirement account, a 401k or from investment income, your SS benefits will likely be taxed as ordinary income.

I don’t know what you mean by “The rest of the money moves into dividends, rents, etc.”. You either have wage or self-employment income subject to FICA or you don’t. You either have investment income not subject to FICA but possibly subject to ordinary income taxes or capital gains tax or you don’t. Or you have a combination of both. You don’t get to “move” or re-allocate wage or self-employment income you’ve already earned into dividends, rents, etc. without having first paid the FICA taxes on them.

With respect to non-wage earnings subject to FICA, i.e. self-employment earnings such as one may earn from speaking or consulting fees, you are going to pay 15.30% on that instead of the employee portion of 7.65% on regular employment wages (the other half being paid by the employer) but paying the 15.30% rate does not give you any more in benefits. Benefits are based on wages earned not the $ amount paid in.

https://www.ssa.gov/news/press/factsheets/colafacts2016.html

Your comment makes no sense unless you are talking about a business owner collecting part of their income in regular wages and part in other forms of non-wage compensation, but that gets very complicated, depends on how the business is organized/classified (LLC, S-Corp or C-Corp) and the IRS has some rules surrounding business owner or stock holder non-wage compensation as to whether such payments are really wages which would be subject to FICA as opposed to actual dividends.

http://www.bizfilings.com/toolkit/sbg/tax-info/fed-taxes/tax-consequences-of-compensation.aspx

As to rental income, that really depends on who legally owns the property collecting the rental income. If it is the business, the rents are paid to the business, not to the individual who owns the business and taxes are paid by the business and possibly again by the owner if paid out as wages. If the owner of the company actually owns the property and the company he or she owns rents that property from the business owner, understand that the rent has to be at fair market value as the IRS would take a very harsh view otherwise (i.e. I can’t charge my business rent at say 2 times the fair market value in order to 1) give my business a huge business tax deduction and 2) re-class what should be wages into rental income as to avoid paying taxes.

Again, it gets very complicated.

[freeandfreezing]

I am vary familiar with taxation as it relates to corporate entities.

You don’t get to “move” or re-allocate wage or self-employment income you’ve already earned into dividends, rents, etc. without having first paid the FICA taxes on them.

I didn't say anything about "income you've already earned." Wealthy people are smart enough, or their advisors are, to arrange income paths in advance. That's why investors may hold positions in companies as creditors, royalty collectors, equity owners, option holders, etc.

[MD Expat in PA]

I am vary familiar with taxation as it relates to corporate entities.

”You don’t get to “move” or re-allocate wage or self-employment income you’ve already earned into dividends, rents, etc. without having first paid the FICA taxes on them.”

I didn't say anything about "income you've already earned." Wealthy people are smart enough, or their advisors are, to arrange income paths in advance. That's why investors may hold positions in companies as creditors, royalty collectors, equity owners, option holders, etc.

That is true, to an extent. However, if you have both W-2 earnings and 1099 MISC earnings from the same company, whether an owner or not, that is often a trigger for an IRS audit. That’s not to say that you can’t legitimately have both, but it is not as cut and dried as you seem to imply. FWIW some stock option exercises (non-statutory) are subject to FICA withholding at the time of the exercise. And some royalty payments are subject to FICA at either the employee or the self-employment rate also depending on the type and who is paying the royalty.

At my last employer we stated a non-qualified deferred compensation plan for the executives and those earnings more than $200k per year.

Wage deferrals into the non-qual plan were not subject to federal or state income tax withholding at the time of the deferral but were subject to FICA. On the other hand, qualified distributions were not subject to FICA since the FICA was already paid but were subject to federal or state income tax withholding at the time of the distribution.

https://www.irs.gov/businesses/small-businesses-self-employed/paying-yourself

[savedbygrace]

So, I am 66 and I began getting SSA benefits every month in February 2016, and I continue to work full time. But the SSA continues to deduct SSA deductions from my paychecks as though they were continuing to contribute to my retirement benefits. They are not.

From that, it is simple to conclude that the SSA deduction is a tax.