Sunday, February 21, 2010

Why does the IRS ask your Job Title? and Austin Plane Crash

Why does the IRS ask your job title? The simple answer is because their are specific tax laws that vary depending on what you do for a living. Specifically the "Self-Employed" status or sole proprietor status.

If you are a self-employed person and do not fall under an "employee" status, you can generally claim many additional expenses, as tax deductions for against any monies received. This is a tremendous tax advantage over an employee, where the employer must pay income taxes for that employee's entire salary.

Typical self-employed careers would be a lawyer, accountant, Doctor, construction worker or dance instructor. All these jobs can be paid a fixed amount per hour to the individual. That individual does not pay income tax on the monies received. Taxes are only applied at the end of the year or quarterly after all expenses are accounted for like office space rent, office supplies, software, car, travel, tools and training costs.

Current tax rates for a self-employed person is 15% for the first $50,000 in net earnings. Where if you made $50,000 as an employee at "normal" job you would be tax at the 28% tax bracket. Think about that.. As an employee your tax rate is almost double that of a self-employed person. So you make $50K working for someone then you have to pay $14k in taxes. But if you work for yourself and made $50K then you only owe $7.5k

The self-employed are at a great tax advantage here. Keep in mind that self-employed typically don't have any benefits like health care so they have to pay all that themselves. In any case, its still a big difference in taxes.

Back to my original question about your job title: This self-employed status is great for many workers in the USA, except in 1986 Congress pass a law that excluded some jobs from being "self-employed." This group of workers were primary technology workers. The exact text was "engineer, designer, drafter, computer programmer, systems analyst or other similarly skilled worker engaged in a similar line of work..."

So this entire group of workers could not work for themselves because some clever government lawyer wanted more tax revenue and decided to single out this group of workers to extract more taxes from them.

Now, I am a technology worker and I ask why not also exclude private lawyers and accountants? Well the answer is simple. It was a lawyer and an Arthur Andersen accountant that wrote the exception into law. Why would those skilled trades people shoot there own profession in the foot?

This law is totally unfair and discriminatory to single out an entire profession. And this was one of many reasons why Joe Stack killed himself flying his plane into the IRS building in Austin, TX. Now, I'm not condoning what Joe did, he was crazy. But I read his suicide letter and tried to put myself in his shoes. I can say I understand his frustration. This law needs to change, but I would never condone anything crazy like what he did..

Here is a NY Times Opinion Editor about this law,

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