If you earn a salary or wages, then you should be paying Social Security payroll taxes. The federal tax code requires employers to withhold part of your check and make a contribution of their own; self-employed workers pay their own share as well as that of the employer. That said, there are a few legal ways to make money and avoid Social Security tax.
Interest, Dividends and Capital Gains
If you are the proud owner of an interest-bearing savings account or a dividend-paying stock, you don't need to worry about Social Security tax. You must declare interest and dividends to the IRS and might have to pay some income tax, depending on your income level. But the "payroll" tax doesn't apply to any kind of investment income, nor does the IRS collect it on capital gains if you sell your shares at a profit.
Exempt Wage Income
Some compensation and fringe benefits are exempt from Social Security tax. You don't pay the tax on medical insurance premiums paid by your employer, or on contributions your employer makes to a pension or retirement savings plan (such as a 401(k). If you earn a higher income, all of your wages may also be exempt. Social Security sets an annual "wage base limit," ($110,100 in 2012); above this level, you don't pay Social Security taxes.
The law also exempts income you earn as an employee of a college or university while pursuing a course of higher education. The IRS requires that you be studying at a bona fide institution, and you must be regularly attending classes. Scholarships and grants are also Social Security tax-free, as are various miscellaneous types of income such as rents, alimony, disability benefits, unemployment compensation, general assistance and Social Security retirement.
Wages or salary you earn as a minister are also exempt from Social Security tax. The religious exemption includes Christian Science practitioners, and members of religious orders who have not taken a vow of poverty. Certain religious sects have also arranged an exemption for their members. This includes the Amish, whose beliefs don't support any public system of medical or social insurance such as Social Security.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.