A couple weeks ago a friend asked me how he could get out of paying Social Security taxes. He feels like there won’t be any Social Security for him when he retires, so he’d rather just save up the money himself. I had done some research on the same topic a couple years ago and I brushed up on it again recently. Here’s how you can get out of paying Social Security and Medicare taxes.
IRS Form 4029
IRS Form 4029 is an application for exemption from Social Security and Medicare taxes and a waiver of benefits from those programs. However, there are a few catches:
- You must be a member of a religious group that teaches against insurance (for conscientious reasons – not because they believe it won’t be around to pay you benefits). This group must also provide a reasonable level of living for its dependent members. Finally, it must have existed continuously since December 31, 1950. It doesn’t matter if you think your group fits the description. It must be approved by the Social Security Administration. Generally, only the Amish and very conservative Mennonite groups will qualify for this specific form. I’m part of a Mennonite church and I don’t think we’d even qualify (unless the SSA knows little about the differences among Mennonites).
- You’re giving up all rights to any benefits you’d be entitled to under Social Security or Medicare. So you better be ready to replace its purpose in terms of life insurance, retirement income, disability insurance, and medical insurance. While that’s no small task, my rough calculations show you’d probably be better off doing those things yourself if you’re young and make more than $30,000/year.
- This exemption only applies to your self-employment earnings and earnings from employers who also qualify for this exemption. Qualifying employers will be limited to individuals, partnerships, some LLCs, and religious organizations. If you work for a corporation (C or S), this won’t do you much good. Unless, of course, you’re paid as an independent contractor and issued a Form 1099-MISC, in which case you’d be filing Schedule C and be subject to self-employment taxes.
- As soon as you are no longer eligible, this exemption ends. So if you leave your religious group or if the SSA determines your group no longer qualifies, you’re back to square one. However, you can become eligible for Social Security and Medicare benefits once the exemption no longer applies.
Basically, not many people will qualify and the exemption is fairly limited (in terms of compensation affected). However, there is another form that serves a similar purpose, but it is even more limited than this one.
IRS Form 4361
IRS Form 4361 is an application for exemption from self-employment taxes for ministers, members of religious orders, and christian science practitioners. Again, there are quite a few limitations:
- You must be an ordained, commissioned, or licensed minister for a church, a christian science practitioner, or a member of a religious order who has not taken a vow of poverty (like people who work for a monastery or convent but are not monks or nuns). That’s a narrow list.
- You have to be conscientiously opposed or have religious beliefs that are opposed to receiving benefits from public insurance based on the performance of your duties as a minister, christian science practitioner, or member of a religious order.
- This exemption only applies to your earnings in that role. If you have another job, you’ll still have to pay Social Security and Medicare taxes on those earnings and you’ll be eligible for benefits based on those earnings.
Again, this exemption is very limited in terms of who qualifies and in its scope.
The Rest of Us Will Just Have to Deal with It
There are no other ways to remain a U.S. Citizen and not pay Social Security and Medicare taxes unless you’re willing to move out of the country. But the real question is whether Social Security will actually run out of benefits by the time today’s young people retire. Everyone bases the idea that Social Security won’t be around on the intermediate projection in the 2008 Trustees Report. But you need to realize three things:
- These are projections based on assumptions. There are no guarantees. People are estimating what they think will happen and running scenarios based on numerous variables. There is much room for error in these calculations.
- Even under these projects, Social Security can still pay 75-78% of scheduled benefits. That’s not great news, but it’s not the end of Social Security either.
- The “fixes” needed are relatively simple and not very drastic either. An increase in the Social Security tax, delay in retirement age, reduction in benefits, or a combination of all three could easily change the projections. In fact, a combination of all three solutions would probably be quite beneficial and have only a slight impact on individual situations.
With that said, I’m still not a huge proponent of the system and I’d gladly save on my own if I had the option. But Social Security was put into place partly because people don’t save on their own. If the current state of personal finances in America is any indication, we’d likely have millions of poverty-stricken elderly due to a lack of financial discipline.
If you enjoyed this, you might like:
- 5 Things to Think of Before Retiring
- Why Hiring a Tax Professional Could Work in Your Favor
- Would Jesus Support the Buffet Tax Law?
- The Root of Riches: Interview with Chuck Bentley, CEO of Crown Financial Ministries
- Tax Tip: Combine a Traditional IRA Deduction with the Retirement Savings Contribution Credit