Income Tax Help in USA PAY FICA or CPP or not

At 01:21 PM 7/27/2007 -0700, you wrote:
There is NO tax advantage to you to have a corporation in the US and a lot more accounting costs for a very dubious hint of personal liability protection with a Subchapter S US corporation.

Hi David,

I have heard you and others say the above statement, although our own experience is a little different. The first year we moved to the US we were not incorporated and the amount of our FICA tax was enormous because we were self-employed. Our local accountant advised us to form an S-Corp. so that we could receive part of our compensation in dividends, thereby avoiding payment of FICA taxes on that amount. It seems to me that this is a common practice here. Have you thought of this aspect?

As always, I love reading your emails ... thanks!


david ingram replies:

I understand the FICA problem but you are missing the point that the FICA is a pension and a form of forced savings.  Avoiding it assures less money in retirement the same as avoiding CPP payments leaves one short in retirement in Canada. 

I was NOT there for the start of the FICA but I was in the middle of the introduction of CPP in Canada and am seeing the aftermath today.  I could likley name 100 people who were well off at one time and have fallen on hard times today because of health, divorce or just plain business disasters. 

I can even use myself as an example because I turn 65 in Sept and have gone through a $5,000,000 bankruptcy and $1,000,000 divorce in the last 5 years.  I will receive a reduced CPP because of  several years of non-contribution when I was literally flying high. 

Every week, I run into someone who is now living on their CPP and OAS or their CPP FICA and OAS mixture and is getting less because they arranged their affairs to pay less into CPP or FICA and today, they have lost all their investments (through illness, divorce or business reversals) and could really use that extra .  $3, 4 or 500.00 per month.  

Strangely, Life Insurance sales people and Realtors, in particular are the worst victims (you notice I did not use the word offenders) because they set themselves up to deduct everything before net income by being self employed whereas they could  have had  full CPP or FICA benefits by being employees and paying CPP or FICA on gross income and then making just about the same income tax deductions as an employee.  (this does require a little manipulation to deduct fax and other machinery but it can be done safely and legally and then the realtor, etc. does not have to rely on welfare in retirement). 

This last statement came to roost just last week when a former West Vancouver realtor wrote me to say that she just couldn't pay a 3 year old bill she had with me because a leaky condominium situation had wiped her out. she has moved to a small town 300 miles away because she does not want to be around her former friends and colleagues as a flat broke retiree getting GIS (guaranteed income supplement which is a politre word for welfare).

Then another recently retired lady called 'today" while I was in teh caribbean Days parade  to ask me to represent her at a strata meeting because she has just been told about a $75,000 leaky condo assessment on her rental condo and that will take $600 a month out of her retirment income for a long long time.
So, I have thought about the "not paying FICA/CPP argument) it but consider it false economy for more reasons than one. 

All sorts of financial people have also shown how much better off you would be if you took the money you have to pay into FICA  or CPP and invested it yourself in "their" product.  Interestingly, two of the high profile Vancouver people who have been pushing that concept for 20 years are living in pure poverty today in Vancouver because of large scale financial reversals.  Knock on wood that I did not become one of them myself.

Interestingly, their clients have done better than they did because the advisors  took big time 'flyers' that did not work while their conservative clients stayed safe.

Please do not fall into that same trap.  However, But,  IF you are not paying into FICA or CPP, do invest what you would have been paying into a sound and safe investment and do not waste the tax 'savings' and spend it in a frivilousl manner.

The problem with making the investment, of course, is that with the exception of Saskatchewan and Texas and a couple of other places I do not know about, most of the private retirement plans can be attacked when you are in financial distress. CPP and FICA can NOT be attacked by creditors. Living in BC, I would have lost any RRSP account I might have set up.