Tax Season

I just read the most eloquent “rant” written by my local tax preparer. I would link to her note directly, but realize you don’t all have Facebook, so I’m going to share it here in its entirety. Please take a few minutes to read it, consider it, and then do something about it in your own community …

SHOP LOCAL: A tax preparers rant.

by Kimi Cole Jones on Thursday, April 7, 2011 at 1:45pm

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Okay, I know I go through this every year, but this year,  seem to have an especially large bleeding heart. I think all of you know where I stand on most political issues: Flaming Blue, party of one?

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I am a tax preparer. There are so many things I know about people that they don’t have to tell me. I have my fingers deep into the financial heart of many self-employed people. I know, driving by the store front of such and such store, what their employees are making, and whether or not they had a good year. I know who hasn’t made their mortgage payments based on their 1098-INTs, I know whose credit is horrible based on their inability to refinance. I know who pays the day they get the bill, who calls to say they will be late paying their bill, and I know who doesn’t call at all. I know how much your medicines cost, I know you don’t have health insurance, I know that you used to give to charity and now you can’t afford to. But don’t worry, Islanders, your secrets are safe with me.

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And I am the one that has to sit across from you, poverty level, holding your new baby and tell you, “You owe Uncle Sam”. Now, I see some of you going no, no that’s not how it works. But I am telling you that this week has been monstrously emotionally traumatizing to me because, yes, that’s is exactly how it works. I can not make my case points here, because these are people’s private finances, so I will pretend that this example is of someone i know doesn’t mind: Me.

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I am self-employed. SURPRISE. I make money. SURPRISE AGAIN, because a lot of the self-employed people out there simply do not. I am not going to disclose exact numbers or depreciation, or get into the boring logistics of tax returns as a self-employed person hell, but the hard number that the IRS considered I made last year is just about $40,000.

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You are an employee. You make a salary at $40k a year, and your monthly pay is $3333 a month. You get your paycheck and, as you know, its only $2800. Where did that other 15% of your check go? Taxes. So, at end of the year, you make 40k, but you only actually got to spend $33,600, a difference of just about $6400. And what those taxes are, are not really important to you, right? I mean, it all comes out in various forms, and you don’t think about where the differences are between social security, medicare, and federal withholding.  Chances are, especially if you have two kids and a mortgage, you are getting a tax return at the end of the year. You paid in $6400, you get back $3000, and you feel great. Woohoo.

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But lets break down that $6400. $1680 was social security, $580 of it was Medicare. Combined, this numbers are what is called FICA, and in your case, the total $2260.00 and these numbers are nonnegotiable. You don’t have an option, no matter how much your mortgage interest or charitable contributions you make to get that money back. On top of this, your employer more than matches these numbers, and cuts a check to the IRS for your portion PLUS their portion, which would be just around $5500.00 TOTAL, $2260 of which were deducted from your check, $3240 was your employer. The remaining $4140 is your Federal Income tax, and in this illustration, you just got back $3000 from. And you feel great. Woohoo.

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Now the IRS has the $1140 you paid in Federal income tax, and the $5500 FICA. They just netted $6640 off the hard work you did this year, and you paid $3400 of it.

Enter me. I made 40k this year, and I have to pay my taxes too. I’m not arguing this fact. But I have no employer, so I have to pony up both halves of my FICA, which is $5500.00. Lets say I also pay my $1140 income tax, which means my tax liability is $6640 at the end of the year, as opposed to the $3400 that you paid.

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Did you see that? I just paid $3240 more taxes than you did.

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All other things being equal, we paid the same amount of income tax, meaning we had the same amount of deductible expenses. The difference is, you got a check from an employer, and I got my checks from other people. And because you have an employer, you also have other things I don’t have: someone to match your 401k, and possibly health insurance. You might also have paid time off, and a membership to the gym. You have the option to claim unemployment, and if you get hurt on the job, you have L&I converage. I have none of that. Just a tax bill of $6640, because unlike you, I don’t have anyone to pull that money out of my earnings before it gets into my hands like you did.

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Small business are the backbone of this country; don’t get me started on my Walmart schtick. I am personally responsible for paying my own bills. I am also personally responsible to cut the paychecks to my employees. My continued success (helps) put food not on ONE table, but four (4?!). And my success is based on people walking into my door and paying $1.09 for an item that they can get at Walmart for $.69.

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That 40 cent difference makes all the difference in the world as to whether or not one of my employees keeps their job. Think about that.

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So this week, I have sat across from so many self-employed people, the most of which has made half of what I did last year, so lets assume this client profited $20,000 all year long. They have no income tax because they hae a mortgage and kids, and we all know that 20k isn’t going to get your very far where all that is concerned. These family of three, poverty level, still has to come up with their FICA (both halves). So as I sit across from this self-employed person, struggling at less than $2000 a month, I have to drop the following bomb: You owe the IRS $2250. Yes, that more than 10% of your income, yes, I understand that you don’t have that. Yes, I KNOW.

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When I have extra money to spend, I don’t do what most Islanders do. I have an extra $100 lying around, I don’t go to Target and get two pieces of furniture and an Icee. I walk into the place on the side of the highway that makes custom furniture and I buy a single piece. It takes three weeks to get that piece, but it fits perfectly where i intended it to go. That $100 which could have piecemealed to a million different places by Target, and I’m not sure they are going to miss it,  may have made Joe Islanders budget for the day. When I have an extra $20, I don’t catch a movie the next time I am over town picking up business supplies that I can’t get here on the island. I go walk around downtown Langley, and spend it on handmade chocolates and a cup of coffee. Because I care that the chocolate store stays open, and I care that my barista gets that extra dollar tip to pay to her daycare so that she could come to work that day.

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Think small, people. I understand how your personal budget looks. I know that you can get twice the stuff at Walmart than you can at Island Drug or Linds, but I encourage you to see where that money is going. Your neighbor who works at (or owns) one of those stores thanks you.