I'm always amazed, when the-tax-system-sucks posts come up on HN, how quickly most commenters are to trash the author and/or lecture the complainer on how wrong they are.
There is a impedance mismatch at work in our system of governance that's not going away any time soon. The government makes laws by sticking people into little boxes and making rules for those boxes. This system of boxes and rules -- the tax code -- is becoming more and more removed from reality by the day.
You make 10K a year selling things at yard sale, nobody is the wiser. You make 10K selling pot, nobody is the wiser. You make 10K by putting little bits on a server somewhere, you're a business. Why? Because Google can report you, that's why.
You buy socks from Amazon from a house in one state, you have to pay taxes. Buy the same socks from another state, pay no taxes. Order overseas, no taxes no matter which state you are in.
In fact all of these are businesses -- or none of them are. It's like arguing about how many angels can dance on the head of a pin. We have this word "business" which has some kind of vague meaning, so we attach a bunch of rules to the abstraction.
We have a 1900s view of how things work that we are desperately trying to take a hammer and pound into a 21st century reality.
In point of fact, the economy works because people are constantly adapting to new circumstances, trying to do the best they can. As the rules get more and more complex, more and more people will end up being quite surprised at the situation they end up in.
Personally I think the system is broken beyond repair -- too many politicians are architecture astronauts -- but however it turns out, I have immense sympathy for the author of this article.
You make 10K a year at a yard sell or selling pot, you owe the IRS money on that income. Just because you're less likely to get caught doesn't make it any less illegal.
Probably the closest "real world" example would be a flea market. Those large flea markets are the google, and the vendors are the independent folks putting ads on their sites. You sell $10k worth of goods at a flea market, you bet your ass that market will have the mechanisms in place to ensure that the IRS knows.
It's not in the government's interest to collect tax on every transaction at every scale, because (a) it costs money to collect tax, and (b) economic activity is itself dampened by the transaction costs of keeping reliable accounting records in case of audits etc.
That's not to say that 10,000 USD annual revenue is too low to be efficiently taxed; but there certainly are points at which it doesn't make sense.
Hi - (this is my first post). I'm not sure I agree with that. For example: Starting in 2011, any vendor or independent contractor payment that aggregates to more than $600 in a year gets a Form 1099-MISC.
Do you think $50/month is worth all these paperwork? I sure don't.
I have to agree. The parent seems to be basing his comment on some form of logic or reason, neither of which seem to be prevalent in government dealings. Not recognizing the burden of 1099ing every entity that I do $600 of business with shows how disconnected the author of this particular bill is from small-businesses. The good news is, there ARE a few politicians who have seen the error in this bill and are attempting to do something about it.
As a small-business owner myself, I can sympathize with the OP about having to get all businessy with his website. Being a small-business and "doing it right" can be a lot of work. You either do the work yourself, or you pay someone to do it. There are plenty of ways to go wrong if you're not on top of it.
Mostly, it's another way for pigs to steal from people. The idea being they can not only throw you in prison for dealing, but then use tax forfeiture laws to take everything you own.
Arguing with facts, good. Using terminology for the police that an angsty teenager would use, bad. Moreover, the target of your animosity is misguided. Baring obvious ethical problems, I expect our law enforcement to enforce a law to the fullest extent. And as determined by the nation as a whole, Marijuana laws are not an obvious ethical problem. It's not a police officers prerogative to ignore the law, even when it will probably change in the next decade or two.
Just to let you know, the way you worded your entire last paragraph reversed the tone of your post for me. What was informative before became ignorant and vacuous. Is it too much to ask that we keep away from the obvious logical fallacies on HN?
Same goes to illegal immigrants. You do not need proof of citizenship to acquire a Tax ID or file a return. Those that are picked up and tried for illegal immigration are much more likely to not be deported/jailed if they have all of their taxes in order.
If you sympathize with the tax code it's probably because you've never bootstrapped a start up. It's hard enough to make it, even without financing the government. A high quality of living is enabled by technology and innovation, and the process that stifles innovation - taxes - should be regarded with extreme caution. If trading with each other is a taxable offense you can expect a severe impediment on innovation. Does anyone really need examples of the failures of centralized economies?
Come on, your post is stupid on it's face. If a high quality of living is enabled by technology and innovation, said technology and innovation is enabled by stuff the government does -- a huge quantity of technology has it's roots in US government spending, and education is one of the 3 big things that states spend money on.
Further, you conflate taxation laws and laws that prohibit things, eg "trading with each other is a taxable offense". In the real world, someone has to pay for the government and businesses pay a piece of the cost.
And you know where the U.S gets those gobs of cash to throw at building new technology? The markets of course! Governments need a marketplace, the marketplace doesn't need the government. The internet is largely unregulated, but we use creative solutions to overcome barriers, and this should be a model for other industries as well. A market solution is always better than a government solution, because with the first you can always opt out.
The richest man in Rome once said that you can't consider yourself truly rich unless you can afford your own private army. ;) Even more interesting is the fact that Crassus acquired his wealth by (1) declaring rich people enemies of the state and seizing their assets and (2) purchasing houses that were burning down and then putting out the fire with his own men. Unless you're an anarcho-capitalist, you'll certainly recognize that a representative government is necessary to put a stop to such behaviors.
Order overseas, no taxes no matter which state you are in
This is not entirely true, I ordered a good deal of hand carved furniture from India one time and a hand carved bed from China another, both times I received a letter from the State of Florida letting me know exactly what I owed the state in taxes.
We have this word "business" which has some kind of vague meaning, so we attach a bunch of rules to the abstraction...
It isn't quantum mechanics. The rules which the OP professes not to understand boil down to this:
1) Everyone owes income taxes and Social Security/unemployment ("FICA") taxes on all of their income. To restate this in a fun but cartoony way: everyone is a "business". [1] No philosophical debate necessary.
1a) Except: If you get a W2 form along with some of your income, that income already had the FICA taxes paid on it (and, if the estimate is accurate, most of the income taxes, too). This feature is designed (among other things) to make the accounting so easy for most people that, if they are minimally numerate and are willing to actually read the IRS instructions, they can pay taxes with a one-page form without hiring an accountant.
1b) If you can't understand what I have said so far, hire an accountant.
2) If you earn more than a few hundred bucks without getting a W2 form for it, you owe FICA taxes. If you can't or won't figure out what Schedule C is, hire an accountant. [2]
3) Business expenses are deductible. If your non-W2 money is going right back out the door to pay business expenses, you may owe nothing. Keep track of those expenses (throw the receipts in a box, buy everything on a special credit card, hire a part-time bookkeeper, or -- god help us -- learn how to keep an account book). Then declare them; if you can't figure out the forms, hire an accountant.
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Still too abstract for you? Here's rule zero:
0) Hire an accountant. Do what the accountant tells you.
One hour of accountant time, at any point over the last few years, would have been enough to save the OP.
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Now we are in a position to discuss your other point: Why do people often get so harsh when folks propose to "simplify" the tax code?
Let's not ignore the elephant in the room: Mostly, it's because so few of these proposals are in good faith. Most of the tax-related writing that crosses one's field of vision is the direct or indirect result of politically-motivated lobbying efforts by individuals who are trying to lower their own taxes relative to others. We try to block these for the same reason that we block spam.
But another reason is that many people want to pretend that accounting isn't important. They ask: Why does there need to be so much accounting? Why can't life be simple? These are very likely the same people who don't understand the need for so much computer programming. Shouldn't computers just be simpler? Can't we just write it all in Visual Basic? Can't it all be done by kids on minimum wage? Can't we just hand it all over to Microsoft and let them handle it? Why can't we just outsource all that stuff to some foreign country? Why can't computers program themselves? Shouldn't it all just "work"? Weren't things so much better back before we had all these terribly complicated things like the personal computer?
It gets tiresome. Society is complicated. Deal with that. Learn basic accounting, or hire someone who did.
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[1] Note: I am not an accountant and you should hire a real one. You can detect the real ones by the moan of despair that they just made when they read my last sentence.
[2] I can, but I won't. Accountants are not expensive relative to my time. In fact, they have an astonishing tendency to pay for themselves.
Everyone owes income taxes and Social Security/unemployment ("FICA") taxes on all of their income.
Actually, this isn't true; the Social Security portion of FICA (which is most of it) is only paid on the first $106k of your gross income (in 2010). Additionally, the word "income" in your sentence reveals some very complex questions about the differences between gross revenue, gross income, modified adjusted gross income, etc. The "income" against which you pay taxes can vary greatly from the actual cash coming into your bank account, thanks to a variety of deductions and credits. I own real estate that produces positive cashflow but I take a "loss" on it every year according to the IRS, offsetting some of my other income.
Thank you for providing a moan of despair, right on cue! According to my off-the-cuff hypothesis, this suggests that you have the soul of a CPA. ;)
Obviously, my pocket-sized rule of thumb isn't designed for people who earn $100+K per year. Those people can afford accountants. Likewise, people for whom adjusted gross income is a necessarily complex calculation involving the phase of the moon can probably also afford accountants; if not, they need a simpler or more profitable financial plan.
Hiring an accountant isn't a particularly difficult thing to do. They're on every street corner. In the month of March, you'll find people dressed in costumes standing at the side of the road, advertising them. [1] And even the robot tax accountant built into Quicken Online was pretty good, in my limited experience. Would Quicken Online have caught the OP's FICA problem? I don't know, but quite possibly. I've never tried to declare substantial quantities of non-1099, non-W2 income in Quicken before, but you'd think it would at least pop up an ominous dialog box.
I agree that income is a complicated issue when it comes to tax and that hiring an accountant would be helpful. But, as an accountant I also think that a little reading could probably be just as good often times since 90% of the issues I see a generally fairly straight forward.
Agreed, and I've always done my own taxes, despite having investment real estate and businesses in different states. However, I finally hired a CPA just to look at my stuff and ensure I'm doing things right.
I think that was probably the smart decision. Learning on your own and then paying an accountant to review your conclusions is very cost effective and it'll definitely pay-off in the long term. If you ever have a question, feel free to shoot me an email. =)
I disagree. taxes don't need to be complex. here in singapore they are much simpler. for years it was done on a post card.
your programmer analogy is interesting. the problem with democracy is you are always mending a legacy system. you can never start over because of existing special interests who are benefitting. this feature provides stability. but it also means no chance for real innovation. all democracies have this problem of spaghetti code laws. places with less democracy can innovate -- places like singapore. obviously there are some draw backs to less democracy. but there can be benefits too
The author indicates that taxes were paid, just the wrong style of taxes:
I had been declaring that ad revenue as "extra income" and dutifully paying my taxes on it. Suddenly last year the IRS informed me I owed them scads of money that I didn't have. Still, it's nice to know the IRS has time and resources to squeeze both me AND the guys who brought down Wall Street. Oh, wait, those guys are still swilling Chivas in their gated burbclaves.
It's an easy mistake to make. I know someone who did this very thing.
It's true that American education does a pitiful job of impressing upon the average citizen that (a) accountants rule the world; (b) you should therefore take a basic accounting class, and/or pay attention to the words in those IRS instructions that the government carefully mails to you every year; and (c) you should talk to an accountant for an hour every few years, unless you can't afford that, in which case you should probably still try to find a way to talk to an accountant, pro bono or something, because they might be able to help.
Talking to an accountant isn't expensive. It's just a task which people think of as unpleasant. It's kind of like somebody moping about how they need to pay $500 for dental work, because they didn't visit a dentist when the problem was easily fixed.
The system isn't broken. It just wasn't written with individuals in mind. The system works wonderfully if you're a CPA or large financial institution.
If people understood their best interests and elected officials acted on behalf of those best interests we would have a simpler tax code. The opacity of law benefits only those who can understand it. Clarity of tax code is simply not in the interest of those who pay for laws to be drafted.
OTOH, the tax code is complicated mainly because of all the special cases that were introduced to pander to people's individual best interests. Like the whole deductions side of the 1040.
There is a impedance mismatch at work in our system of governance that's not going away any time soon. The government makes laws by sticking people into little boxes and making rules for those boxes. This system of boxes and rules -- the tax code -- is becoming more and more removed from reality by the day.
You make 10K a year selling things at yard sale, nobody is the wiser. You make 10K selling pot, nobody is the wiser. You make 10K by putting little bits on a server somewhere, you're a business. Why? Because Google can report you, that's why.
You buy socks from Amazon from a house in one state, you have to pay taxes. Buy the same socks from another state, pay no taxes. Order overseas, no taxes no matter which state you are in.
In fact all of these are businesses -- or none of them are. It's like arguing about how many angels can dance on the head of a pin. We have this word "business" which has some kind of vague meaning, so we attach a bunch of rules to the abstraction.
We have a 1900s view of how things work that we are desperately trying to take a hammer and pound into a 21st century reality.
In point of fact, the economy works because people are constantly adapting to new circumstances, trying to do the best they can. As the rules get more and more complex, more and more people will end up being quite surprised at the situation they end up in.
Personally I think the system is broken beyond repair -- too many politicians are architecture astronauts -- but however it turns out, I have immense sympathy for the author of this article.