Save $18,130.50 on Self-Employment Tax in 2015

July 13, 2015

by Bobby Casey

Save $18,130.50 on Self-Employment Tax in 2015Would you voluntarily invest $18,130.50 per year for the next 15 years with virtually no chance of any reasonable return and a higher than average risk of a total loss?

According to the CBO (congressional budget office) the Social Security fund will be exhausted in 2030 unless income exceeds expenditures. That is just 15 years from now. Scary thought.

Considering that in the CBO’s own report (you can download it here), the fund had a 9% deficit in 2013 and will grow to over 17% annually over the next decade – it seems highly unlikely that income will exceed expenditures anytime soon.

You should also understand that the Social Security fund is no “fund”. In reality it is just a line item on the CBO’s expenses and Social Security deposits actually just go into the general fund. And we all know how fiscally responsible those in Washington are….

I bring this up because as taxpayers and Social Security fund contributors, you have a reasonable expectation to receive benefit from your “investment”. But unless you plan to retire before 2030, the chances of receiving any benefit seems slim to none.

With that said, do you have any options for NOT contributing to the Social Security fund since you likely will not get any personal benefit?

The answer is a resounding, “YES!”

From my research, I can find 3 options:

  1. As an Amish, Mennonite, or Anabaptist member, you can file IRS form 4029 and become exempt from all social security tax
  2. As a Minister, Member of a Religious Order, or Christian Science Practitioner, you can file IRS form 4361 and become exempt from all social security tax
  3. Or if you live overseas, qualify for the Foreign Earned Income Exclusion (FEIE), and are employed by a foreign corporation, you are exempt from social security tax

Best I can tell, option 1 requires a lot of work and a legitimate association with one of the mentioned religious groups. If you are like me, this is not a good option.

Option 2 seems a bit easier since practically anyone can become an ordained minister these days, but I don’t think I am interested in joining the ranks of the Christian Science Practitioners.

That leaves us with option 3.

And considering the added benefit of living, working and traveling the world – I’d say this is an ideal solution.

In 2015 if you qualify for the FEIE, you can earn $100,800, tax free. In order to qualify for the FEIE, you must either;

  • Be physically out of the US 330 days in a 12 month period; or
  • Be a bonafide resident of another country

In addition to the $100,800 in tax free income, you can also get a housing deduction that averages about $50,000 per year (varies based on country – see IRS form 2555 instructions for breakdown by country).

The problem is that if you are just self-employed, you would still owe 15.3% in self-employment tax on your income up to $118,500 (for 2015).

So based on the average housing deduction of $50,000, you can earn $150,800 income tax free. But you would owe $18,130.50 in self-employment tax on the first $118,500.

In order to avoid this, your income must not be self-employed, but instead come as a salary from a foreign corporation.

For example if you form an Anguillan IBC with an offshore bank account, you can receive 100% of your earned income from your client base and pay yourself the max tax free salary as director of $150,800.

By doing this you can avoid the self-employment tax as well as income tax. If you earn greater than $150,800, you can leave it in your Anguillan IBC tax deferred.

For those of you living overseas or spending a significant amount of time traveling, this could save you a ton of money.

If you are interested in setting up an offshore company and bank account, email me at [email protected] information.

Until next time, live well.

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