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.

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

But he will also qualify for a higher SS payout since his income is higher, if my understanding is correct.

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/

~$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.

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.)

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.

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.

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.

(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.

> 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.

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.

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.

> Does it ever make sense to pay more SS tax, based on a present-value analysis?

Of course it does. Social Security is social, not individual. If you're a rich man - and a person who makes 160 KUSD / annum probably is - it makes a lot of sense to contribute more to social security, whether voluntarily or involuntarily.

They specified "based on a present-value analysis". They were interested in SS as a personal money-returning interest for that question.

That doesn't mean they don't think that people should pay taxes for welfare programs like social security or for other governmental functions, it just wasn't what the question was about.

Certainly if you're after the second bend (very realistic for a lot of folks) there is minimal return on contributing.

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".

It's also just good optics. "$160K is a reasonable developer salary." Even if in practice it's not how they want to use the money right now, it's setting expectations correctly.

One difference: you have control over when you give yourself a pay raise instead of having to go through the org chart/board. May not be the most efficient strategy with taxes though.

There are two benefits to showing a higher income on paper:

1) Some situations like mortgage applications and child adoption will require some sort of income verification. It's a lot harder when you aren't showing as much top-line income.

2) If the project goes south and the author has to find another job, showing a "market rate" salary is better than the true rate (sadly many people and companies still talk in terms of percentage increases)

How would a future employer know what his salary was?

He could show them W2's from the current employer.

Has anyone (OK, any SW dev in the US) ever done this? I've been in the industry for almost 30 years and no prospective employer has ever asked me what my salary was.

Not in the US, but in the UK all my jobs have asked previous salary. What's more ridiculous was one position where the recruiter was trying to convince me to take a job with a company at a lower salary than I wanted. His argument was your last salary was X so the new company aren't going to pay you y, because y was too much higher than X...

They've always asked me. But they've never asked for a W-2 to prove it.

I’ve had a few recruiters ask me. I don’t tell them anymore.

Yes, I've done this once. I was moving from the SW industry to another industry that doesn't pay nearly as well. I was asking for less than 1/5th of my salary, and they thought the number was too high. I offered my current salary to prove "we're both experiencing quite a bit of pain here..."

I think the poster was probably asking why anyone would tell a future employer this information.

Employers should pay what they value the position at, not what someone else was paying for it.

Would you refuse an employer that wanted a past W2 as a non-negotiable?

I feel like there’s a bit of trust involved in the whole hiring process. If they think I’m lying and can’t pay me what I want, then why do they believe anything I said during the interviews. I don’t want to work with people that think lying to them after a few conversations.

Yes.

But why would he? It's none of their business

I know nothing about it in the US, but in the UK it would be their business once he started and they set him up on payroll. You could still argue none of their business, 'can only harm you' in negotiating salary of course - and in a large enough org the same people would never know, but otherwise could be a short-lived deception and maybe you'd feel weird about that once colleagues.

In the US, it's asked but I learned a while ago to dodge the question if they ask. If they're genuinely unsure, that tends to be a red flag. If they have a number in mind, we just negotiate and see if we can't come to a common understanding. I say that with the understanding that negotiating isn't something that comes easy for a lot of folks. I personally have found it an extremely useful skill over the years.

Different markets will bear different negotiation tactics. California, for example, made it illegal for a potential employer to ask a candidate this information.

I meant that, negotiation aside, here it literally is their business (via form P45) in setting you up on payroll. (Unless you time it or take a break such that the new job is your only one since 6 April, i.e. in the current tax year.)

Thinking about it - I do know/can infer a little about the US - everyone does (or has someone do) their own taxes there, so it's not needed. The purpose of this in the UK is that the second employer within a tax year can set up the new employee correctly so tax isn't underpaid as a result of ignoring the previous income.

(PAYE - Pay As You Earn - income tax, national insurance contributions, and student loan repayments are handled by employer. People only 'do taxes' (self-assessment) here if self-employed, have capital gains over the allowance or sale price over the reportable amount, etc. extra curricular stuff like that that, especially because of allowances before the tax kicks in, most people don't need to. I would guess the most common reason is pension contributions made with post-tax money (employer's pension scheme is of course paid into primarily through payroll, not that) for those earning enough to have a higher marginal rate of income tax - you get the basic rate back on contributions automatically, since everyone pays it, but any extra requires self- assessment.)

It is never an employers business to know previous salaries. It's wildly I appropriate they would have stones to actually inquire

It really depends on how the business entity is set up. The line between what your salary is and what the business makes blurs. There are tax law implications, but it's less about tax avoidance and more about not screwing yourself. Depending on the business structure, one reason I know for setting a salary is because you're forced to. Certain taxes in the US (FICA) are based off of your income. They don't want you to set a salary of $1, for example, and then pay yourself via dividends to avoid taxes. The IRS states it has to be 'reasonable.'

I don't know if this applies to the States but at least in some European countries if you ever move to another country you are taxed for what you would have been expected to pay in taxes based on the profit the company made in the last years.

Paying yourself a high salary (as long as it's reasonable, so as not to arouse suspicion of hidden profit distributions) allows the business entity to not make any profit on paper and therefore allows you to move to another country without having to pay this "exit tax".

Disclaimer: This is my understanding of the situation, I'm neither a lawyer nor a tax professional and this is not financial advice.