Well, we've gone and done it. Healthcare reform has begun and we won't look back. For better or worse, that train is rolling. Now that legislation has finally passed on that issue, what will our cavalier government do next to better serve the people? My vote: fix the ridiculously circuitous tax code.
Recently, Jonathan Kern wrote an article for All Things Considered on NPR that brought into focus a little bumblebee that's been buzzing around in the back of my mind. The premise of the article states that our acceptance of software used to file taxes averts our focus away from the fact that the US personal tax code is ridiculously complicated. The article can be read and listened to here.
As you might suspect, this hit a little close to home. For most of my professional life I was someone's employee working under a W-2. I never knew how good I had it. In 2009 I was offered a chance to work as an independent contractor under a 1099-MISC. The benefit for me was the ability to control my work schedule, earn more money and pay less taxes (or so I thought). My clients benefitted by not having to pay FICA, various insurances, and business taxes on my behalf if I were their employee. It seemed like an ideal situation...until 'Uncle Sam' got involved. Even researching the self-employment tax thoroughly didn't uncover the hidden hitch in the tax code. I didn't realize what I had gotten myself into until it came time to file.
I've been gainfully employed for over 17 years and only once have my taxes been completed by a tax professional. In the early days, I literally would do my taxes by hand. Longform. It wasn't until the late 1990's that I started using tax software. (I've never been audited.) Even the early tax software was cumbersome but I managed. During the US governments' Age of Decadence the tax code became more and more labyrinthian as they needed to squeeze more and more dollars from John Q. Public. Like a lot of other Americans, I relied on tax software more and more.
Present day, the software is telling me I owe 4,000 more dollars than I have calculated. My math has never been that bad. The self-employment tax is designed so that you do not have to pay the employers half of the FICA (Federal tax and social security) BUT, what they don't tell you is that you will be taxed twice on the amount earned under the 1099. You will have to pay the personal income tax on that amount and then pay the self-employment tax on the same amount. I was devastated. The only way around this is to become an S-Corp which essentially is a tax shelter. You would had to have set this up before you starting earning under a 1099.
At first I felt bamboozled, led astray, but at the end of the day I had no one to blame but myself. Maybe if I had gone one step further and consulted a tax professional in the beginning I would have avoided this trap. I consulted the worst possible source for the self-employment tax...the IRS publications website. Also, they were vague about having to pay those taxes quarterly or suffer a penalty. Although that penalty is minor, about 2%, it could be avoided.
In the end, I consulted a tax professional to at least get the tax owed down through additional deductions but the best I could do was still miles from where I expected to be. The minute she heard my issue she sighed and shook her head. In short, she said I had been setup. She's sees a dozen people a week during tax season who were lead into this trap. Like students who are roped into internships that don't pay or teach them anything in the hopes that they may land an actual job there someday. All they did was give the company free labor. The devastating truth is, universities and corporations are in cahoots.
I had always believed that we needed a simpler tax code but only through education on the subject did I realize just how deceptive it is. All along I had been drinking the Kool-Aid because the tax software made it taste so good.
Tuesday, April 6, 2010
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