According to the IRS you are a private contractor employed by Google

http://www.etymonline.com/index.php

by mikecane • 16 years ago

174 116 16 years ago

larsberg• 16 years ago

It wasn't entirely clear from this article, but it looks like he was paying normal income tax on the money coming in, but failed to pay self-employment taxes. I have talked to more than a few iPhone developers whom this happened to as well -- forgetting about that extra 15.3% can really hurt.

But, did he remember to track and deduct all of his expenses? The flipside to that income is that the server costs are all deducted from it. If he really was "just barely covering costs" with his Google ads income, it should be 15.3% of nearly zero dollars. He may even be owed a refund if he was paying full income tax on the ad revenue without deducting server costs.

I am not an accountant, but I've dealt with SE tax and had a few "conversations" with the IRS in the past. For all the worries about them being biased, I've found them to be fair, as long as you have precise documentation.

jeffmould• 16 years ago

Agree the article is very vague on what he was doing when filing. Most likely he was not paying the self-employment taxes and get audited; however, like you said, he should have been deducting expenses. I am not an accountant or tax attorney, but I believe in this case, as long as he kept detailed records he can go back and refile. They may ask him for receipts and documentation, but that should be fairly easy to acquire from his hosting company. I have had to refile my tax return for a previous year, it was not part of an audit, just missed a 1099 and didn't realize it until the following year. My accountant took care of refiling and ended up getting a larger refund.

stellar678• 16 years ago

It seems crazy to me that it's even possible to accidentally pay "payroll" taxes on your income an not pay the extra self-employment tax. If you use any kind of tax preparation software, it's completely calculated for you. You just enter 1099s and W2s and everything comes together.

kevinpet2• 16 years ago

I think you're confused. "Payroll tax" and "self-employment tax" are both informal ways to refer to the employers portion of social security tax (FICA). It sounds like this guy was paying income tax on it, but not social security or medicare (which is about 15% total for self-employed).

This is an entirely reasonable mistake because that is the correct way to do taxes on unearned income like interest. Only earned income is subject to social security and medicare.

tomjen3• 16 years ago

I don't understand the US tax system, but are you supposed to pay more money when you don't have a job than when you do have a job?

100k• 16 years ago

Theoretically, your employer pays half the employment taxes and you pay the other half. When you are self-employed you must pay all of them. Of course, this simply equates to W2 employees being paid less income.

alanstorm• 16 years ago

There's a (roughly) 15% tax on income that covers social security and medicare. As an employee, 7.5% of this comes out of your paycheck, and your employer has to match the other 7.5%. When you're self-employed, you need to pay both ends of this (unless you start getting tricky with the way you incorporate)

kls3• 16 years ago

Well that is what I don't understand about the article, sure unless you are a S-corp you are going to get nailed for FICA and even if you are you don't totally duck them. By my issue with the article is; great you are now a company, you just got a ticket to take a boat load of new deductions, write-offs and depreciations. If he was just skirting by, he should be able to prove this via deductions which should more than offset the mandatory FICA portion. I mean if he is spending that much it should not be that hard to shave off 8% in deductions.

jharrison3• 16 years ago

It seems pretty clear by the article that he wasn't doing any of the "business" things like tracking deductions or documentation of any kind. He could probably muster up his hosting and domain name bills but that would be it, and probably the majority of any deduction he could take anyway (recognizing his library and other "support" items as deductible as well).

noonespecial• 16 years ago

He's probably not nearly as SOL as he thinks. As others are already pointing out, he probably just needs to come at it as a "self employed individual". There is tax for this, but also many deductions. A few choice minutes with a tax professional would probably clear up most of his problems.

Unfortunately, those minutes would have been a bunch more helpful before he ended up with penalties for not filing, but again, a good tax professional can probably help him negotiate a more reasonable settlement.

pyre• 16 years ago

By 'tax professional' do you mean a lawyer or an accountant? I remember hearing ads on the radio some years back for a tax lawyer claiming that it was better to see a lawyer than an accountant because the accountant can be forced to testify against you (but attorney-client privilege protects you if you get a tax lawyer).

jharrison3• 16 years ago

I agree. He's not as SOL as he thinks, in general. I think where the SOLedness comes from is that he has a tax bill that he knows he can't pay right now. It's a scary place to be and probably feels like the end of the world. It's not (yes, speaking from experience).

It's unlikely that the IRS will do anything drastic in his case. He'll probably just go on a payment plan and figure out how to move forward with his website. They'll work with him.

terra_t• 16 years ago

The guy's a dumbass. If you're making money off your site, it's a business, just that simple.

It does cost a few 100$ every year, but if you get income from anything other than W-2 jobs, you'd better have an accountant.

  I've definitely had little accidents in my filings and minor trouble with the IRS but my experience is that,  with the help of an accountant and some common sense,  these problems can be worked out easily

gscott• 16 years ago

More likely he has a Hobby not a business http://www.irs.gov/irs/article/0,,id=186056,00.html

smackfu3• 16 years ago

And the reason for the distinction is so that people do not call their hobby a business and then deduct their expenses against their other normal income and evade taxes.

kylecordes• 16 years ago

It's a simple reality: if you are collecting money by doing something, from a tax point of view it is almost certainly a business; even if you casually think of it as not-a-business.

But this person, if they put the brakes on the conjecture and so on, and instead go talk to an accountant, can probably get it all taken care. It will take work; it will probably be necessary to refile the last N years of taxes with the appropriate form on which to list both the business revenues, and business expenses (of which it sounds like there were plenty). He may even get some money back.

Of course, doing that work is much less fun than venting.

jcborro• 16 years ago

He should only have to pay self employment taxes on self employment income, which at $1500 & 15% indicates he was bringing in 10k / year in google ads, which seems reasonable with those traffic levels. That is hardly breaking even unless he was running it on a Cray.

The sorry fact is while you may think your tax rate is 15% or 25%, there is always that extra 15%, even for the employed. In employee's case, they pay half (FICA) and the employer pays half, which of course reduces real earning potential by that amount. It's a scam to talk about taxes rates and only quote the federal income tax rate.

cullenking2• 16 years ago

Where is that camz guy that was offering free tax advice for startups a couple weeks back? He may be the person to quickly consult, at least as far as what the next step is: http://news.ycombinator.com/item?id=1837299

cullenking2• 16 years ago

I just sent him an email with this post, hopefully he'll have ten minutes to add some wisdom to the conversation.

DanielBMarkham• 16 years ago

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.

enjo• 16 years ago

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 the same thing here.

pinksoda2• 16 years ago

There was a guy who got caught selling a lot of marijuana and didn't get in much trouble because he was paying taxes on it since day 1.

barrkel2• 16 years ago

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.

smokeyj2• 16 years ago

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?

earl2• 16 years ago

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.

kls3• 16 years ago

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.

M1573RMU74710N2• 16 years ago

If I'm not mistaken what happened was this person was the one reporting the income, they were just reporting it incorrectly.

tedunangst• 16 years ago

Nobody ever writes long blog posts saying "I paid my taxes. End of story." There's a definite bias in that only bad news ever gets reported.

One anecdote about is not an indictment of the whole system.

chc• 16 years ago

Nobody ever says, "Ted Bundy didn't kill me. End of story." There's a definite bias in that only bad news ever gets reported.

One killing is not an indictment of the whole person.

Just because something works OK (not great, but OK) in the average case doesn't absolve it of terrible behavior in less common cases.

mechanical_fish3• 16 years ago

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.

---

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.

ryanwaggoner3• 16 years ago

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.

Your best advice here is to hire an accountant :)

adolph• 16 years ago

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.

kablamo• 16 years ago

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

smutticus• 16 years ago

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.

smackfu3• 16 years ago

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.

grandalf• 16 years ago

Most of this kind of things probably slips under the IRS's radar. Similarly, when's the last time anyone here declared the value of gifts they received as income?

The problem with this sort of thing (and the new 1099 rules) are that they criminalize a large swath of the population. Sure, the violations are minor, but the fact is if you break the rules you are guilty of a crime.

The problem with this is that if we're all already guilty then it gives enforcement officials too much power over us.

chopsueyar4• 16 years ago

karma whoring...

"Did you really think we want those laws observed?" said Dr. Ferris. "We want them to be broken. You'd better get it straight that it's not a bunch of boy scouts you're up against... We're after power and we mean it... There's no way to rule innocent men. The only power any government has is the power to crack down on criminals. Well, when there aren't enough criminals one makes them. One declares so many things to be a crime that it becomes impossible for men to live without breaking laws. Who wants a nation of law-abiding citizens? What's there in that for anyone? But just pass the kind of laws that can neither be observed nor enforced or objectively interpreted – and you create a nation of law-breakers – and then you cash in on guilt. Now that's the system, Mr. Reardon, that's the game, and once you understand it, you'll be much easier to deal with."

smackfu3• 16 years ago

Gifts aren't income. Unless someone is compensating you for work done in lieu of pay.

(The gift tax applies to the giver, not the receiver.)

mikecane• 16 years ago

My question is this: What about Amazon and other affiliate links? And why do I see the spectre of IRS declaring free services as some kind of "in-kind" taxable thing, liable to a "use tax" or somesuch? I think this can all snowball pretty quickly given how hard up budgets are on all levels of government.

DanI-S• 16 years ago

I moved to the US last year and work a regular full-time job. I haven't had to file taxes before, since I only started work in May. I'm about to launch my first 'weekend project' to potentially involve some advertising and Amazon-affiliate revenue. I'm not really clear on what I should be doing and what is necessary with regards to tax, registering as a business, etc.

Can anybody recommend any good resources for information to help me avoid situations like this chap has got himself into?

ScottBurson• 16 years ago

Try Nolo Press: http://www.nolo.com

They have a lot of good, basic information explained well.

space-monkey• 16 years ago

Get a cheap tax-accountant. It seriously can take years to really come up to speed on our tax system. It's not so complex that a somewhat trained professional can't answer all of your questions, and ask you some good ones in a short session, but it's relatively easy to miss something doing your own research. Do as I say, not as I do, of course!

pinksoda2• 16 years ago

You can get a free consultation from just about any tax professional. They would have noticed your mistake within a few minutes of talking to you.

The IRS usually takes 3 years to find a mistake like yours. It sounds like you've been filing wrong since 2005. The penalties suck but you got to keep that extra 15% for a really long time.

Most importantly, you have a really long time(6-12 months) from your initial notice from the IRS, before they start trying to collect. You couldn't pay right now even if you had the money, that was my experience anyways. I received a different letter from them, months later, and was finally able to pay.

Everyone knows you don't mess with the IRS. I don't get how you did this wrong for 6 years, never researched it, asked someone, or talked to an accountant. My gut tells me you probably knew what you were doing.

jrockway• 16 years ago

What a whiney baby. You have to pay taxes. You don't have to shut down your site and sell it to a "spammer" because you forgot to pay. You pay the taxes and consider it a lesson learned.

There is a reason why Google sent you a 1099 form and not just an account statement, after all. Now you know what it is. No need to whine about how it's some sort of conspiracy -- you sell your time to someone, you're a contractor, you made income, and you pay income taxes. It's very simple.

The rant about the "financial crisis" was also off topic. Selling insurance really cheaply to people that you should be selling it to for a lot of money is not the IRS's problem. When the banks can't loan money or give back deposits, though, that is a problem, and that's why they got bailed out. Most of the banks paid back their money years ago. TARP is over. You got your money back. Now you need to do your part and pay what you owe the government.

(Whenever I write an article and it ends up in the tone of voice that the poster's ends up in, I realize that I fucked up and I'm not going to get any sympathy. I hope the author also learns that lesson. You make mistakes -- fix them, don't whine about them. If you want a new tax system, run for office. Your blog is not going to change anything except the public's perception of you.)

tibbon• 16 years ago

I'm curious though- could have all of this been fixed by filing and saying, "look, our expenses 100% meet our income... no tax burden!"?

gallerytungsten2• 16 years ago

If he had incorporated, absolutely. From the context of his blog, it seems he didn't.

cheald• 16 years ago

I'm pretty sure you don't need to incorporate to take deductions on self-employment expenses. Self-employed income isn't just a free ride to a kick in the balls - if you're paying that extra 15%, you get to take expenses as deductions. If it's low-level income that is just covering expenses, you're not going to owe the IRS a dime.

camz6• 16 years ago

Hey guys. Sorry for the slow reply. Thanks Cullen King for the shoutout. I'm traveling to meet a client so I wasn't able to check HN as often as I usually do.

I'll email him shortly later today to offer my help directly. But I'll post a few thoughts just so that anyone else in a similar position will be prepared.

Everyone pretty much hit the mark with the self-employment tax issue. SE Tax is a 15.3% tax that you have to pay on income earned from a business.

It sounds like the etymonline guy pretty much got hosed from paying income tax on the income but failure to pay the SE Tax.

Google issues 1099s to anyone that earns over 400 or 600 dollars so the IRS knows if you're making money.

But, from the sound of his explanation. His server and upkeep costs should've generated enough expenses to wipe out his income. I'd have to speak with him directly and more in depth but that is the impression he left in his plead.

Also, there are ways to avoid paying SE tax entirely. If you incorporate into a S Corp and pay yourself a reasonable income, the rest would be excluded from SE Tax. An Scorp is a passthrough entity which means that all income is not taxed twice like a regular Corp. You pay tax on the income once on your 1040. But because the scorp is still a corporation, then you wouldn't pay SE tax on that income because the distribution is a dividend. You don't pay SE taxes on dividends.

Also, it seems like the taxpayer isn't clear about his options once the audit has commenced. Luckily, I'm sure that the taxpayer could still plead his case if he has some facts that could help his situation.

But these are my initial thoughts on the situation. I'm going to email him now and see if he's interested in discussing the issue further.

I'll update everyone on this issue later on if he is willing to allow me to speak on the matter as a learning experience for everyone.

polynomial• 16 years ago

> Google issues 1099s to anyone that earns over 400 or 600 dollars so the IRS knows if you're making money.

Why do I feel like noting this could have saved more than a few words in the article; at the very least, how was it that this salient fact is never mentioned?

> Also, there are ways to avoid paying SE tax entirely. If you incorporate into a S Corp and pay yourself a reasonable income, the rest would be excluded from SE

Ditto. This one note seems a much more valuable takeaway than most everything in the article.

Not trashing the article, just that camz nails the important points with a greater economy of words.

ars7• 16 years ago

Is you do incorporate you will need to pay corporate taxes, in addition the corporation will need to pay the employer portion of the SE tax. (So you don't pay it, the corporation does, and since they need to pay it they reduce your salary by that much, i.e. it's a wash.)

Becoming a corporation will not reduce your taxes, but it will significantly increase the complexity. The main benefit it liability, not financial.

duffbeer703• 16 years ago

Give Caesar his due.

If you aren't trying to make money, you may be able to report it as a hobby, deduct your expenses and avoid self-employment tax.

dmfdmf2• 16 years ago

Perhaps this is a startup idea for the ambitious types on HN. There are literally 1000's of very successful blogs making some marginal amount of money from ads on their site. Most of these bloggers are not in it for the money and would like a publisher to take care of the business side of things, including the taxes. Perhaps this already exists but I am not aware of it.

dotBen2• 16 years ago

The problem is that the "taking care of business" is basically you putting it on your tax return correctly.

No one else can really do that for you other than your accountant.

dmfdmf2• 16 years ago

Yes, but adding W2 income to your tax forms is pretty easy and insulates you from all the tax and legal implications of running your own blog for a small income. Whereas adding a Schedule C for 1099 income exposes you to all those risks, taxes and complexity. It sounds like the guy who wrote the original blog post didn't really discuss this with his tax and legal advisors because his mistake was easily avoided if he had properly claimed the income.

jackfoxy4• 16 years ago

The income tax system, and the principle of taxing income, is wrong in so many ways, but I have given up arguing the point. The inertia of the system and the inertia of individuals is too great to overcome. I've identified these major contributing factors:

1) Vested interests that like the tax system the way it is.

2) Envy and fear of envy. People who think the income tax takes from the rich, and people who happily pay their fair share because they have guilt feelings about their level of income, and think others should too.

3) The last reason is the overwhelming majority think of the income tax system as THE natural and logical system for raising revenue, having no clue about how it came into being and evolved.

moultano2• 16 years ago

What do you propose instead? A link is fine.

ars7• 16 years ago

I assume he wants consumption (i.e. sales or vat tax) instead of income tax.

Google "fair tax" for one such proposal.

jackfoxy4• 16 years ago

The right, even obligation, of the sovereign is to dip a straw in the stream of commerce and extract revenue. Tax farming was the way to do this in olden days, a highly inefficient and grossly unjust means. Today the income tax is the predominant means, and it is sold as the socially just alternative. I don't want to argue the social justice aspect. I pointed out some contradictions in another comment.

I will argue for an alternative that is far more efficient and retains progressive elements.

In the U.S. the tax collection points number in the 100s of millions. This incurs cost on the sovereign, reducing the value of the collected revenue, and on the taxpayers, increasing the burden of the tax. It makes much more sense to switch to a system where the tax collection points number in the 10s of thousands, and the rules are transparent.

Public utilities are already extremely efficient tax collectors. Take a close look at your utility bill. The taxes may have confusing names, but they are there, and the utility collects them and remits them to the sovereign with very small staffs implementing very simple rules (compared to the IRS tax code).

Bear with me, I am now getting to the meat. Think of an energy transformation tax. Whenever energy is transformed (in most cases combusted), it is taxed. Somewhat like a value added tax, but only for energy. For instance, coal at the electrical generator: taxed; natural gas to heat a building: taxed; gasoline or diesel pumped into a vehicle:taxed; electricity at a meter: taxed.

Utilities are already set up to do this. Just bring on oil and coal companies and a few others. Those are your tax collectors.

Social justice / progressive tax? The utilities are also already set up to do this. So-called life-line or base-line rates on bare minimum consumption don't get taxed. Likewise a minimum level of gasoline and diesel consumption could be tax free to individuals.

Energy consumption underpins virtually all economic activity. There is no escaping taxes in the underground economy. Energy theft can be made a special case of crime with appropriately draconian punishment.

And do you really want to soak the rich? What do you think their energy footprint looks like compared to the common man's? Even when all they do is clip coupons.

Concerned about rising CO^2 levels? Tax hydrocarbon conversion higher than others. That which you tax you get less of. That which you subsidize you get more of.

The economic analysis of tax rates on different fuels is very feasible compared to analyzing the entire economy. I don't underestimate the capacity of elected politicians to complicate and demagogue anything, but an annual debate on energy conversion rates would be far more transparent than the budget process.

Of course it would be a big shock to jump to such a system in a single year, and this has only been a brief outline of such a plan. Better to implement over several years and dedicate the IRS to catching tax cheats from the old (income-based) system while it is mostly phased-out.

ebiester• 16 years ago

As a nation, we've decided that we like things like infrastructure should be paid in part by the federal government. We've also decided we want to have a military that spans the globe, able to support regular operations as well as two wars with presences in over 50 countries costing over 600 billion dollars, not even counting the extra war supplemental or military retirement benefits.

The fundamental fact is that the poor do not make enough money to pay for all this. Further, it is the wealthy that most benefit from the government's services -- without the roads, without the extensive police network, commerce would be much more difficult.

Thus, it makes sense that the wealthy, who are most able to afford taxes, would pay for most of it. (When you tax someone to the point where they cannot afford food or shelter, you will see revolution and civil war. Few make money in that situation.

Thus, progressive taxes are the most likely in a wealthy society. (Feudalism works on regressive taxation as an alternative.) Income is one of the easiest methods of progressive taxation.

jackfoxy4• 16 years ago

The income tax system is only superficially progressive. Two examples:

1) Everyone's earned income below about $105K has an additional 12.1% tax called Social Security. Half of that is disguised as the employer contribution, but it still has an impact on the economic activity available to poorer people in terms of wages offered, and even the number of jobs offered. Social Security benefits are paid from the general fund, and Social Security taxes are paid into the general fund. This is a regressive tax. The only distinction is the benefits you eventually draw are somewhat determined by your contributions.

2)The truly rich (I'm not talking about couples in expensive metropolitan areas earning $250K) have the luxury of great discretion in regards to when, how, and even IF they take income.

...and we haven't even talked about the underground economy, which by definition does not pay income tax.

...and let us not forget all the tax cheats, the greatest of whom got a Presidential pardon. http://en.wikipedia.org/wiki/Marc_Rich

poet3• 16 years ago

Can you write a few sentences about why the principle of taxing income is wrong and what you propose instead? The salary of my first job is largely a function of the fact that I was born in the United States and educated by some of the best public institutions in the world. It's a fact that I would be paid less had I been born a citizen of a different country. On a simple level it seems very logical to me that my income be taxed because it reflects the benefits I have received from living in the US.

arron61• 16 years ago

You should have sought for a professional tax preparer's advice. Any professional would have seen your mistake immediately.

You have your regular w2 form's amount from work. Any additional money you tacked on as additional income, the tax professional would have questioned where this extra money is coming from.

He or she would have identified that you got extra money as a business (you do not need a business license) but you must file this in a different form and pay the appropriate taxes (including social security, medical, and the other business-related taxes). The tax professional would have asked you for possible deductions and you could have deducted all your business income from it.

There's nothing unfair about this. IRS is doing the right thing. It's really your fault for getting a crappy tax professional or for doing your taxes yourself. And to add, tax professionals aren't even that expensive.

presto8• 16 years ago

Turbo Tax is also an option. It correctly handles this sort of income.

codexon• 16 years ago

Yes, the US tax system is too complex... but I find it really hard to believe that he didn't make a large profit with 50,000 page views per day with a relatively static PHP site (hosting cost probably $10/month).

rbarooah• 16 years ago

What level of tax professional does someone in the OP's situation need? Will a trip to the local H&R block sort it, or does he need to look for someone more specialized and if so, how would he identify them?

kls3• 16 years ago

He needs a CPA in a situation like this, mine a very good one for my area charges around $600 for my taxes and that is a "Dump Papers" job. In other words I dump the papers off and they figure it all out. It would be around $300 for a here is all of my information, it's all organized find stuff I have missed. Every year, with out fail he has paid for himself and then more. The first two years I organized everything and did the online DIY tax thing as a reference. The first year he came in $6000 over the best I could do on the DIY stuff. I can't to stress it to people enough, if you are a professional making over $60k, you cannot afford to not have a CPA. You are without a doubt walking away from money.

dotBen2• 16 years ago

I wonder if some of the problem the OP is in this mess is because he's either using a do-it-yourself tax return system and not made the correct deductions or he's gone to an HR Block 'chop shop' who have not listened/understood his income streams.

I'm not sure CPA is needed (my rule is >$100k total income, use a CPA else just a 'tax attorney'/'accountant' type person). But someone who understands these things would be helpful.

kevinpet2• 16 years ago

I've looked through the IRS site and there are explicit statements that if you have profit from a hobby, that should be reported as "other income". I think the author could have made a very reasonable mistake.

It is pretty clear that he should have been deducting his expenses from the site and only reporting the profit as self employment income. If he was actually making $10k in profit, then he should have been aware that it was more "business" than "hobby" and used those rules.

For those not familiar, the IRS has a category for a hobby because some people may have a hobby that looks a lot like a business that loses money. You can't deduct losses against your outside income, as you can in a serious business that just happens to have not made money that year.

Not a lawyer, not an accountant. Just someone who can read.

PedroCandeias• 16 years ago

I fully sympathize with Douglas. But I do think he's dramatizing his two most realistic options a bit too much:

1. If he runs Adsense, he's not going to get casino or penis ads. Last I checked, Adsense was pretty strict about that.

2. Asking users for donations is hardly begging. He's providing (one hell of) a service in return, so it's only fair.

I've seen this before. People reviling the notion of associating money with the service they provide, and eventually running into money trouble sooner or later.

Even if Douglas chooses to go down the nonprofit road, he'll still have a much harder time than if he just declared etymonline.com a business and ran it as he saw fit.

chopsueyar4• 16 years ago

Some 1040Xs?

tocomment• 16 years ago

What is he talking about? If he paid taxes on the incomewhy do they think he owes them?

daimyoyo• 16 years ago

Thus far, I've only made $0.24 with my adsense account so if the IRS wants their nickel, I'm glad to give it to em. If my site should take off, I'll worry about it then. But thanks for making me aware of the problem.

tomotomo• 16 years ago

The IRS is at least generous enough to let you make that quarter tax-free.

frankus• 16 years ago

The author mentions thinking about doing an iPhone app, but being put off by the $9500 price.

I know the revenue share pitch is a big old red flag for any developer worth their salt (most people who want to do a revenue share have some sort of scammy half-baked idea with nothing else to offer for which they want half of the revenue).

But this guy is clearly bringing something important to the table (a curated database of etymological data), and the app wouldn't be that complicated (depending on whether the database ships with the app or is lazy-loaded from the server).

According to the IRS you are a private contractor employed by Google

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