Monday, March 20, 2006

It Should be Easier to be Self Employed

This past weekend, I took part in the wonderful yearly ritual of paying my taxes. I do them myself with the aid of a computer program. I’m too proud (and cheap) to hire an accountant and I stopped going to H&R Block when I realized their tax preparers are just glorified typists using a tax program I could buy for myself.

As a freelance marketing and advertising writer/consultant, my taxes are particularly fun to complete. And particularly costly as I have to pay both my contribution to Social Security/Medicare and the portion usually paid for by an employer (those who are self employed must pay 15.3% of earnings as compared to just 7.65% for traditionally employed workers). It’s called the self employment tax and its very existence is a weight around the neck of all entrepreneurs.

In fact, the entire way taxes are calculated and collected is a burden to the self employed. Not only do the self employed pay more in taxes than those in traditional employment but the self employed are also responsible for saving up their earnings, figuring out their tax liability and mailing-in their payments to the IRS. An employee of a company has money automatically deducted from their paycheck but us self-employed have no such system. We’re left to fend for ourselves or face late fees and penalties for underpayment.

This, I believe, is a significant problem for our economy. As globalization takes hold, we’re going to need a flexible workforce. One of the ways Americans can keep ahead is by going to work for themselves, leaving the middleman of traditional employers behind and selling their skills and services on the open market. But the ability to go-it-alone is hampered by the tax burden placed on the self-employed.

We should either eliminate the self employment tax or allow up to half of it to be placed in a private, IRA-style account. And we should stop penalizing the self employed for not filing quarterly taxes. Anyone who makes under a certain amount (say, $150,000) should be allowed to pay their taxes in one lump sum rather than having to figure out their liabilities every three months.

Those steps would immediately make self-employment more feasible and thus help keep our workforce fluid and our economy humming. Of course, to make self employment truly viable, we also must fix our healthcare system. Decent healthcare is nearly unaffordable to the self employed and that too is a major reason why many Americans who want to work for themselves are unable to do so. But the burden of healthcare on our economy is a post for another day.

8 Comments:

Anonymous Anonymous said...

blah blah blah. get a job, hippy.

1:41 PM  
Anonymous William Crim said...

I am a freelance programmer, so I deal with this stuff too. I don't exactly see what your argument here is.

Regarding Self-Employment tax, I don't understand why this is chafing so much. So you have to pay the employer portion of Seocial Security and Medicare, in addition to your own personal contribution... Why is this a tremendous burden? If you work for an employer, the government sees 16% of your income as SS taxes, if you are self-employed, they see the same. They want their 16%, your benefits are calculated based on the assumption the government will get 16%.

Regarding Estiamted tax payments, don't do calculations, do it the easy way...

Take what you owed last year, divide by 4, then send htat payment in once every 3 months. Even better, get
https://www.eftpssouth.com/Eftps/
This is the IRS website for making electronic payments. This is the same system employers use. No fees, and you can schedule ALL of your tax payments at once, and the money will be withdrawn when the estiamtes taxes are due.

Or your bank should have a business plan for making payroll.

2:30 PM  
Blogger Alan Stewart Carl said...

William,

What seems straight-forward to you can seem quite burdensome to others. I know a lot of freelancers in the creative fields that have run into many problems with their taxes (maybe their brains just aren't geared for it, but they shouldn't be penalized for that). It would hardly effect the government's collection of wealth to allow self-employed types to only file once a year without penalties.

As for the self employment tax, I understand the government's reason for collecting it, but I worry that the loss of income (coupled with all the other risks one takes when going out alone) could keep a lot of people from taking their skills to the open market. I believe that increasing the opportunity for people to become self employed will be key to our nation staying competitive in the global marketplace. Our tax code should promote that, not penalize that. I'm pretty sure we can ammend the Social Security program to reduce if not elminate the self-employment tax.

3:03 PM  
Blogger Tom Strong said...

I agree with your broader point - entrepreneurship (far more than that lugubrious beast we call "capitalism") is at the heart of our economy, and we should do everything we can to nurture it.

But at the same time, I agree with William's point: the self-employment tax you pay is also paid by employees of companies. Only in our case, it's taken out of the paycheck before we ever get it. Of course, whether our companies would choose to pay us that portion if they didn't have to give it to the government is another question; but there's no question that employees would have a vested interest in getting them to pay it...

5:57 PM  
Blogger Norton said...

As a self-employed person myself, I can understand your point of view. Estimated taxes can be a special burden for those who have a variable income. You are almost forced to overpay your taxes, and give the govt. an interest-free loan if you want to avoid penalties and interest.

You can also look at this a different way. Why not end withholding and payroll taxes, and have everyone pay taxes the same way? That just might increase the ranks of fiscal conservatives as people see how much they are really paying in taxes.

I would bet that there is a good proportion of libertarians who are self-employed. Could it be (at least partly) because they have more intimate knowledge of how much we really pay to the government, especially in payroll taxes?

10:10 PM  
Blogger Dymphna said...

"Get a job, hippie"???

Say wha'...?

I agree with you the stuff is onerous. But the whole tax code, not just the self-employed part, is a big, fat, corrupt mess.

I do like the SEP IRAs, which allow you to take some money away from the bloated gummint and put it away. But you're right: you have to keep a right good amount (as they say around here) ready to give to the taxman.

That's why we file in October. It's only psychological to get a delay, but it allows you to scurry a little longer.

Think of this, though: you could be self-employed in one of those EU horror shows...it might make you feel better.

BTW, think about getting an accountant and just dump it all in his lap.

4:46 PM  
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