Which compensation package to choose re. Social security?

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boggler
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Which compensation package to choose re. Social security?

Post by boggler »

If I'm choosing between, say, a salary package of 80k per year with a 25k annual guaranteed bonus, vs. a salary package of 100k with a 5k annual guaranteed bonus, which one should I pick from the perspective of social security? Would I be better with the additional social security earnings of the higher salary, or would I be better if I simply took the higher bonus and invested the tax savings myself?

See this for more context
http://www.bogleheads.org/forum/viewtop ... 0&t=137844
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tainted-meat
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Re: Which compensation package to choose re. Social security

Post by tainted-meat »

I'm confused as to how the bonus money would not be subject to paying FICA taxes.
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TomatoTomahto
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Re: Which compensation package to choose re. Social security

Post by TomatoTomahto »

tainted-meat wrote:I'm confused as to how the bonus money would not be subject to paying FICA taxes.
Now, if you could arrange to be paid by a hedge fund instead ...

The thread OP pointed to is locked; it was no more actionable than this one. :sharebeer
I get the FI part but not the RE part of FIRE.
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tainted-meat
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Re: Which compensation package to choose re. Social security

Post by tainted-meat »

Ah, I hadn't thought about that, thanks.
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boggler
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Re: Which compensation package to choose re. Social security

Post by boggler »

TomatoTomahto wrote:
tainted-meat wrote:I'm confused as to how the bonus money would not be subject to paying FICA taxes.
Now, if you could arrange to be paid by a hedge fund instead ...

The thread OP pointed to is locked; it was no more actionable than this one. :sharebeer
I can assure you this is quite actionable for me. I want to start by understanding the general decision process around this issue.
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Dale_G
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Re: Which compensation package to choose re. Social security

Post by Dale_G »

There is no decision process. Salary and the bonus count the same as far as social security is concerned.

Dale
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boggler
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Re: Which compensation package to choose re. Social security

Post by boggler »

Dale_G wrote:There is no decision process. Salary and the bonus count the same as far as social security is concerned.

Dale
Assume the bonus is not subject to social security tax. This is true for some types of equity or bonus compensation.
Jack
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Re: Which compensation package to choose re. Social security

Post by Jack »

boggler wrote:
Dale_G wrote:There is no decision process. Salary and the bonus count the same as far as social security is concerned.

Dale
Assume the bonus is not subject to social security tax. This is true for some types of equity or bonus compensation.
Sorry, but bonuses, deferred compensation and equity compensation are subject to social security tax. An exception are incentive stock options, but in that case, the compensation is not deductible by the company and essentially, the company pays the taxes for you.

One possibility for FICA exemption would be health insurance premiums and FSA, but their are practical and legal limits to the amounts.
freddie
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Re: Which compensation package to choose re. Social security

Post by freddie »

A case where this comes up is where a guy owns an S-corp and has the choice of either giving himself a 20k bonus (pay FICA and yes you have to pay a reasonable salary) or a 20k distribution (No FICA).

On average you will get more money investing it yourself. There will be some subset of cases where you do worse. How much you value the minimum versus the maximum is up to you.
Jack wrote:
boggler wrote:
Dale_G wrote:There is no decision process. Salary and the bonus count the same as far as social security is concerned.

Dale
Assume the bonus is not subject to social security tax. This is true for some types of equity or bonus compensation.
Sorry, but bonuses, deferred compensation and equity compensation are subject to social security tax. An exception are incentive stock options, but in that case, the compensation is not deductible by the company and essentially, the company pays the taxes for you.

One possibility for FICA exemption would be health insurance premiums and FSA, but their are practical and legal limits to the amounts.
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boggler
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Re: Which compensation package to choose re. Social security

Post by boggler »

If we look at the extra FICA tax as money that could be used to purchase a COLA annuity, does that make the analysis easier? (Is Social security a "good deal" as an annuity?)
Jack
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Re: Which compensation package to choose re. Social security

Post by Jack »

freddie wrote:On average you will get more money investing it yourself.
You could also say that on average you will get more money if you always invest 100% of your portfolio in the stock market, yet very few people do so.
basspond
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Re: Which compensation package to choose re. Social security

Post by basspond »

freddie wrote:On average you will get more money investing it yourself. There will be some subset of cases where you do worse. How much you value the minimum versus the maximum is up to you.
I was curious too. So I got all of my and employers contribution history from SS. Ran a portfolio model based on putting the contributions (minus disability portion of SS, which currently makes up 1.8 of current rate of 12.4%) into a "personal account" and applying the return of the S&P 500. I plan to retire at 55, so years 55-62 (and forward), no additional contributions I am just applying the "lowest" S&P 500 average for any 15 year period which is 6.47%.

My portfolio would have to generate a whopping return of 1.144% to equal my benefit at 62, 1.28% at 67, and 1.324% at 70. If I used the average of all 15 year periods (12.6%) these numbers are 0.620%, 0.555%, and 0.485%.

So I would not choose a decision that would max out your SS payments.
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boggler
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Re: Which compensation package to choose re. Social security

Post by boggler »

basspond wrote:
freddie wrote:On average you will get more money investing it yourself. There will be some subset of cases where you do worse. How much you value the minimum versus the maximum is up to you.
I was curious too. So I got all of my and employers contribution history from SS. Ran a portfolio model based on putting the contributions (minus disability portion of SS, which currently makes up 1.8 of current rate of 12.4%) into a "personal account" and applying the return of the S&P 500. I plan to retire at 55, so years 55-62 (and forward), no additional contributions I am just applying the "lowest" S&P 500 average for any 15 year period which is 6.47%.

My portfolio would have to generate a whopping return of 1.144% to equal my benefit at 62, 1.28% at 67, and 1.324% at 70. If I used the average of all 15 year periods (12.6%) these numbers are 0.620%, 0.555%, and 0.485%.

So I would not choose a decision that would max out your SS payments.
How would your results change if you only counted employee contributions?
The Wizard
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Re: Which compensation package to choose re. Social security

Post by The Wizard »

Dale_G wrote:There is no decision process. Salary and the bonus count the same as far as social security is concerned.

Dale
... and also for state and federal income taxation...
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sscritic
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Re: Which compensation package to choose re. Social security

Post by sscritic »

Sure there is!

no action that I can see.

The OP claims it is actionable for him, but can't give the details of the bonus payments that aren't subject to SS.

OP: do you have a job offer that you are considering?
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Re: Which compensation package to choose re. Social security

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