5 ms·

This is just me taking a guess, but one benefit to him setting a real salary and donating the money back is that for the purpose of credit checks and consumer l

This is just me taking a guess, but one benefit to him setting a real salary and donating the money back is that for the purpose of credit checks and consumer loans (e.g. a home mortgage for a primary residence), he can qualify for appropriate amounts. It also appropriately models what's happening: he's paying himself a "market salary" (in quotes because his market value is probably much higher than that, but I'm speaking relatively to a "stipend salary" here) and he is working full-time on the project, but donating back the portion he doesn't need to spend on disposable income (due to his own personal frugality). Actually quite an admirable way to do it -- hopefully he has figured out some way to not suffer extra taxes from that setup.

TAForObvReasons 5y ago
He is definitely paying extra taxes. Donations don't reduce social security and medicare tax liability, and depending on the arrangement either he or the foundation is paying for the "other half" of the tax
- vorpalhex 5y ago
  But he will also qualify for a higher SS payout since his income is higher, if my understanding is correct.
  - hawk_ 5y ago
    yes that's one of the reasons in some countries if you have the ability to set your own salary you aren't allowed to take salary and instead must set yourself up as a "freelancer".
  - mwint 5y ago
    Never really thought about it. I’d love for someone with knowledge to weigh in on this: Does it ever make sense to pay more SS tax, based on a present-value analysis? I guess it’s really three questions: 1) For each dollar to SS taxes, do I expect to get more than a dollar from SS in the future? 2) Same question as 1, but inflation-adjusted future dollars. 3) If the expected return is positive, does it beat reasonable market returns? Guessing the answer depends on age, income levels, etc. I just don’t know how to do the math myself.
    - TAForObvReasons 5y ago
      (not a financial professional, not advice) You need at least 40 "credits" over your working life to be eligible for social security benefits. Each calendar year you can earn up to 4 "credits", which in 2021 corresponds to $1470 in earnings that are taxed. So it definitely makes sense to earn the credits every year e.g. $6000 in 2021. SSDI looks at the last 10 years of earnings if you're older than 30, which still incentivizes hitting that minimum target. As for the actual income in retirement, that is a complex subject. For example, the optimal money move is to continue working to full retirement age, but you may want to take the early retirement option (even if the payout is smaller) to enjoy the extra healthy years.
      - caturopath 5y ago
        > the optimal money move is to continue working to full retirement age Only your highest-earning-of-SS-income 35 years matter, so it's conceivable (and probably not too rare for many HN readers) to have had 35 max-income years before FRA.
        deleted 5y ago
        [deleted]
    - caturopath 5y ago
      After the first "bend", the ROI for SS tax is super-duper low. If you're working for 35 or more years, this would be ~12k/year in 2021 dollars a year. Thus, if your income will put you over the poverty line, paying more unnecessary SS tax past that won't help very much. (I'd put a number on the ROI, but it depends on how old you are.) It's not very hard to make a spreadsheet to play with numbers if you want. I'm considering retiring soon, decades before eligibility, and I've enjoyed playing with the numbers, as I have the opportunity to contribute more or less in the coming years fairly easily.
      - caturopath 5y ago
        FWIW, given my history and current payout schedules and that I die at 85 (when actuarial tables say I will) and counting the employer portion of the SS tax as tax paid and assuming I retire very soon, SS tax payed by me has a 1.4% real rate of return. That being said, SS has some benefits that make it more attractive than other investments with that return (in that it's an inflation-indexed annuity backed by the US government), especially when mixed with my other investments. Still not a fantastic deal for me and it will only get worse in the likely event I get more SS income over the years, but like all welfare programs it isn't meant to help someone in my current situation. Part of getting into my current situation was benefiting from welfare when I was part of a household wasn't in such an amazing situation financially.
  - p_j_w 5y ago
    It's semi-complicated and depends on what happens later in his career (SS uses the highest income from X number of years to determine your payout), but in the general case, yes it will increase his SS payout.
    - lotsofpulp 5y ago
      It also depends on how much future politicians neuter the benefits, via some combination of deflating the currency and/or modifying Social Security to be more means tested. I would bet dropping birth rates will certainly mean some people will be need to take a haircut in the coming decades.
  - loeg 5y ago
    SS contributions cap out at around $143k (indexed with inflation). Beyond that, extra income has no impact on your eventual SS payout. Even below that threshold, returns on Social Security tax associated with higher income are pretty small once you meet the 40 credit threshold for any benefit[1]. [1]: https://rootofgood.com/early-retirement-social-security/ https://rootofgood.com/early-retirement-social-security/
    - scarmig 5y ago
      ~$400k in lifetime earnings fills out the 90% AIME bracket; ~$2M in lifetime earnings fills out the 32% bracket. I think that, so long as you're still in that 32% bracket, you're more likely than not getting (small) positive returns from paying SS taxes. Though I agree, it'd be silly to continue working or to declare higher income purely for that.
      - loeg 5y ago
        To clarify, my comment was about annual income; not lifetime. Income in any given year beyond the annual cap does not affect your SS lifetime earnings. (I think you probably know that, just adding it for other readers.)

TAForObvReasons 5y ago

He is definitely paying extra taxes. Donations don't reduce social security and medicare tax liability, and depending on the arrangement either he or the foundation is paying for the "other half" of the tax

vorpalhex 5y ago
But he will also qualify for a higher SS payout since his income is higher, if my understanding is correct.
- hawk_ 5y ago
  yes that's one of the reasons in some countries if you have the ability to set your own salary you aren't allowed to take salary and instead must set yourself up as a "freelancer".
- mwint 5y ago
  Never really thought about it. I’d love for someone with knowledge to weigh in on this: Does it ever make sense to pay more SS tax, based on a present-value analysis? I guess it’s really three questions: 1) For each dollar to SS taxes, do I expect to get more than a dollar from SS in the future? 2) Same question as 1, but inflation-adjusted future dollars. 3) If the expected return is positive, does it beat reasonable market returns? Guessing the answer depends on age, income levels, etc. I just don’t know how to do the math myself.
  - TAForObvReasons 5y ago
    (not a financial professional, not advice) You need at least 40 "credits" over your working life to be eligible for social security benefits. Each calendar year you can earn up to 4 "credits", which in 2021 corresponds to $1470 in earnings that are taxed. So it definitely makes sense to earn the credits every year e.g. $6000 in 2021. SSDI looks at the last 10 years of earnings if you're older than 30, which still incentivizes hitting that minimum target. As for the actual income in retirement, that is a complex subject. For example, the optimal money move is to continue working to full retirement age, but you may want to take the early retirement option (even if the payout is smaller) to enjoy the extra healthy years.
    - caturopath 5y ago
      > the optimal money move is to continue working to full retirement age Only your highest-earning-of-SS-income 35 years matter, so it's conceivable (and probably not too rare for many HN readers) to have had 35 max-income years before FRA.
      - deleted 5y ago
        [deleted]
  - caturopath 5y ago
    After the first "bend", the ROI for SS tax is super-duper low. If you're working for 35 or more years, this would be ~12k/year in 2021 dollars a year. Thus, if your income will put you over the poverty line, paying more unnecessary SS tax past that won't help very much. (I'd put a number on the ROI, but it depends on how old you are.) It's not very hard to make a spreadsheet to play with numbers if you want. I'm considering retiring soon, decades before eligibility, and I've enjoyed playing with the numbers, as I have the opportunity to contribute more or less in the coming years fairly easily.
    - caturopath 5y ago
      FWIW, given my history and current payout schedules and that I die at 85 (when actuarial tables say I will) and counting the employer portion of the SS tax as tax paid and assuming I retire very soon, SS tax payed by me has a 1.4% real rate of return. That being said, SS has some benefits that make it more attractive than other investments with that return (in that it's an inflation-indexed annuity backed by the US government), especially when mixed with my other investments. Still not a fantastic deal for me and it will only get worse in the likely event I get more SS income over the years, but like all welfare programs it isn't meant to help someone in my current situation. Part of getting into my current situation was benefiting from welfare when I was part of a household wasn't in such an amazing situation financially.
- p_j_w 5y ago
  It's semi-complicated and depends on what happens later in his career (SS uses the highest income from X number of years to determine your payout), but in the general case, yes it will increase his SS payout.
  - lotsofpulp 5y ago
    It also depends on how much future politicians neuter the benefits, via some combination of deflating the currency and/or modifying Social Security to be more means tested. I would bet dropping birth rates will certainly mean some people will be need to take a haircut in the coming decades.
- loeg 5y ago
  SS contributions cap out at around $143k (indexed with inflation). Beyond that, extra income has no impact on your eventual SS payout. Even below that threshold, returns on Social Security tax associated with higher income are pretty small once you meet the 40 credit threshold for any benefit[1]. [1]: https://rootofgood.com/early-retirement-social-security/ https://rootofgood.com/early-retirement-social-security/
  - scarmig 5y ago
    ~$400k in lifetime earnings fills out the 90% AIME bracket; ~$2M in lifetime earnings fills out the 32% bracket. I think that, so long as you're still in that 32% bracket, you're more likely than not getting (small) positive returns from paying SS taxes. Though I agree, it'd be silly to continue working or to declare higher income purely for that.
    - loeg 5y ago
      To clarify, my comment was about annual income; not lifetime. Income in any given year beyond the annual cap does not affect your SS lifetime earnings. (I think you probably know that, just adding it for other readers.)