Look closely - especially if you're at work - and you can actually see her soul leaving her body.
Dissatisfied in your job? Here’s the time-tested solution: tough it out, be thankful you have one, and come in next weekend just to emphasize the latter point.
Or you can tell The Man which orifice he can shove his company picnic and break-room coffee into, and go out on your own. Incorporate.
There are several volumes’ worth of reasons to do this. We can’t go into all of them now, but one of the best-kept secrets of incorporating is the regressive Social Security tax.
You might not be familiar with the concept of a regressive tax, but it’s easy to grasp. There are 3 species of tax:
-A proportional tax is one levied at a fixed rate. Sales tax, for instance. If your jurisdiction charges 7% sales tax, then any item subject to the tax costs 7% more than the list price whether the item goes for $1 or $100,000.
-A progressive tax means the higher the base amount, the higher the rate. Income tax in the United States (and most everywhere else, as far as we know) is an example.
That leaves the rarest bird in the aviary, regressive taxes.
You mean there are taxes where the greater the amount subject to the tax, the less you pay? That’s absurd. And illegal, right?
It’s cute that you think that. Not only do regressive taxes exist, they’re authorized by the same federal government that you entrust to have your best interests at heart. To fund the 2 biggest and least tenable programs in its tentacles – Social Security and Medicare.
Out of all the confusing, capricious, seemingly arbitrary taxes we pay, Social Security and Medicare taxes might be the most senseless.
The federal tax collectors (sorry, we don’t know most of their names, but Doug Shulman is the Internal Revenue Commissioner) take about 15.3% of your salary in the form of Social Security and Medicare “contributions”. Collectively, these are dubbed FICA – after the Federal Insurance Contributions Act. Remember, Social Security was invented because federal officials of a bygone generation decided that Americans were too stupid to save for retirement. Therefore it would take a benevolent government populated by financial geniuses to make those critical investment decisions for our grandparents, our parents, you, me, and our descendants. Medicare is essentially the same thing, but earmarked for a different purpose.
If you never look at anything but the net pay amount on your paychecks, take some time to read the other numbers. Just once. That 15.3% breaks down like this:
-6.2% employee’s Social Security taxes
-1.45% employee’s Medicare taxes
-6.2% employer’s Social Security taxes
-1.45% employer’s Medicare taxes.
Hopefully this is obvious, but you’re wrong if you think your employer pays its share of these taxes as a necessary cost of keeping so wonderful a worker as you on the payroll. She doesn’t pay these taxes, she merely collects them. You pay them. Your employer factors these taxes into your salary when she hires you. If your employer wasn’t required to pour 7.65% of your income into the subterranean trench that is the federal government, she wouldn’t. Instead, she’d much rather attract you and other employees with wage levels that are 7.65% higher than what you think you’re currently making.
How is this regressive? Sounds proportional to me.
The Social Security portion of your FICA taxes is capped once your annual income exceeds $106,800. You pay the 2.9% in Medicare taxes no matter how much you make, but the Social Security portion can’t go above $13,243.20. (Half of that levied directly on you, the other half levied on you via your employer.)
So the higher your salary – past $106,800, anyway – the smaller the proportion of it you pay in Social Security taxes. On the one hand, this gives you incentive to work hard and earn money. On the other, it’s the kind of inequality that French revolutionaries chopped off people’s heads for.
If you’re an independent businessperson, and you structure as an S corporation or a limited liability company, you can run around the system instead of through it. Incorporate, and you can pay out part of your company’s profits to yourself as salary while paying out the remainder as dividends. The former is subject to FICA, the latter isn’t.
What’s the downside?
You’d be surrendering the “certainty” of a regular, constant paycheck. As if there exists an employer who could guarantee such a thing in perpetuity anyway.
Still, it sounds promising. So why doesn’t everyone do this?
The usual reasons: fear of the unknown, lack of faith in themselves, etc. The same negative thinking that’s been holding most human ingenuity back since we figured out fire and the wheel.
Note: Some people blather that sales taxes aren’t proportional because the less you earn, the higher a ratio of your income you pay in sales taxes.
First off, sales taxes aren’t levied on income, they’re levied on sales. See “income tax”, above. Second, there’s no way around this. Unless you think state legislatures and municipal governments should mandate that merchants ask people how much money they make before determining how much tax to collect.
