The Missed Tax Opportunity

I’ve got a beef. Now, it’s considered rude to discuss politics or religion in polite company, but y’all readers (who more likely than not are also writers) may share this beef, so I figure I might as well tell you.

It’s about everyone’s favorite thing to hate: Taxes.

First, let me be clear: I actually don’t mind paying taxes. I know, that sounds hard to believe, but it’s true. Taxes are good, in that stuff that the community at large needs gets paid for. I like having schools; I prefer it when my roads are well-maintained; I think it’s a good idea that our service men and women have sufficient armor.

But there is one tax that I think is just wrong-headed and counterproductive: self-employment taxes.

It’s a little tricky, so let me explain. When you work for someone else, some of your income is taken out to go to Social Security and Medicare and stuff like that.  Then, come tax time, you also pay any additional income taxes you may owe–this is set up in income brackets. Generally, it’s a percentage of your income. Mine is about 15% last I checked. At my last job, everyone in my general rate of pay wound up overpaying the IRS, resulting in a nice happy refund.

But I didn’t.

What was the difference? Self-employment taxes.

See, I had been honest on my taxes and reported that I’d earned a little bit of money from my side business as an editor. But I was only using one of those answer-the-questionnaire programs, so I never had any human to actually advise me. If I did, they would have explained this part for me.

Because, as a self-employed person, there is no one to take out those SS and Medicare-type taxes, the government puts that on for you come tax time. It’s aptly called the self-employment tax. It’s about 12-15%, depending on the year. And then, in addition, you pay income tax. And they stack, making my estimated taxes on my side business 30%. That’s a considerably more uncomfortable number, particularly because it’s a very small business.

On top of that, the IRS expects a check from self-employed folks 4x a year, so they are regularly getting the money needed to run the country. Rather than just paying taxes through an employer and once a year, a small business owner has to pay regularly. And if you don’t know that or miss a deadline, you get charged interest.

It can be quite surprising.

So last year, even though I made a very paltry sum in my side business, it threw off my total earnings and meant I had to pay Uncle Sam instead of getting a refund. This was disappointing, so I’ve been doing my homework this year to try to get ahead.

But like I said, I don’t mind paying taxes. My problem is: this kind of tax discourages people from starting their own businesses. And, considering a) how turbulent the economy has been and b) how we as employees can no longer trust that business loyalty between worker and owner goes both ways (ie. that you won’t be fired), encouraging more people to be self-employed–even just partially–is a great idea.

I had the privilege of hearing Dr. Muhammad Yunus, the founder of Grameen Bank, speak several years ago. Grameen Bank is all about providing small loans (microloans) to the poorest of the poor to help them start their own businesses. His work is literally transforming his home of Bangladesh, and his model has been adopted all over the world.

Unsurprisingly, Dr. Yunus is also a big fan of self-employment. It is safe to say that his talk and book inspired me to start my own business, too. But Grameen Bank is really struggling to work in the United States. Why? These kinds of taxes–even just the part about it being difficult to learn about what these taxes are–works against the very small entrepreneur. Sure, all the angel-funded entrepreneurs in Silicon Valley getting millions for an app that earns $0 fit right in, but the Etsy seller, writer/editor, or ice cream salesman struggles.

Personally, I think we need to lower that barrier to entry. We could encourage all those people who are on disability in rural areas to earn income, giving themselves a sense of purpose. It would encourage those who are currently hiding their non-9-to-5 income (you know who you are) to come out and be more honest. And it would give a boost to the overall economy, because, while self-employment isn’t for everyone, it can be as steady as the worker wants it to be. (I’ve found it often means I work more than when I’m working 9-to-5 only, because I’m more committed, more interested).

I think it’s just sort of a shame. Obviously it is important that the country’s bills be paid, but I think the current way self-employment tax is structured is a lost opportunity.

Am I the only one who feels this way?

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