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.
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.
---
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.
---
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.
---
[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.