Slashdot Mirror
Our Low-Tech Tax Code
theodp writes "After establishing that nothing can excuse Joe Stack's murderous intentional plane crash into an IRS office, a NY Times Op-Ed explains the reference in Stack's suicide note to an obscure federal tax law — Section 1706 of the 1986 tax act — which the software engineer claimed declared him a 'criminal and non-citizen slave' and ruined his career. Interestingly, a decade-old NY Times article on Section 1706 pretty much agreed: 'The immediate effect of these [Section 1706] audits is to force individual programmers ... to abandon their dreams of getting rich off their high-technology skills.' Section 1706, the NYT Op-Ed concludes, 'is an example of how Congress enacted a discriminatory law that hurt thousands of technology consultants, their staffing firms and customers. And despite strong bipartisan efforts and unbiased studies supporting that law's repeal, it remains on the books.'"
Cost, lack of coverage for pre-existing conditions and in general the mess that is the US insurance industry.
That's not how I read the article. The law creates tax issues for individual programmers who incorporate: if your business has only one employee and is less than one year old, the IRS comes looking for you. And as a matter of policy, the IRS is harassing _the employers_ of such contracting companies. The result is to discourage individual programmers from incorporating on their own.
Partly due to the economic issues lately, I've had _a lot_ of recruiting companies trying to recruit me to leave my work and come help them earn their recruiting fees. It's taken me a lot to stop laughing, sadly, when they say how lucrative it is: salary equal to my current salary, but without benefits or vacation, unemployment, and on a "temp to perm" basis for a company that is already falling apart due to letting their qualified engineers go at the start of the crisis is not a good place to go. I've reviewed the potential for consulting, and while it makes sense for some, it's not the wonderful and economically sound decision that many recruiters would have you believe.
I'm not a tax attorney, but I do know a little about the situation. Here's a brief summary:
There's a lot of concern over how to classify workers as either "employees" or "independent contractors." Each has its own pros and cons, but in general, it's better for a company to consider its workers as contractors from a tax perspective. Because taxes are radically different based on how an employee is classified, a misclassification that is turned up by the IRS can be very expensive for a company. As such, there is a "safe harbor" which protects companies who have a reasonable basis in considering an employee to be an independent contractor.
There was a sense this was being abused in the technology industry in the 1980s, and as such, Congress amended the law. The amendment didn't change the classification system of employees versus independent contractors, but did remove the safe harbor. As such, companies became much more reticent to hire a worker as an independent contractor, because the penalty for getting it wrong was much more likely to be assessed.
I'm a lawyer, but not yours. I wouldn't represent someone who thinks taking legal advice from Slashdot is a good idea.
The more interesting part of the tax provision was that it was introduced by Patrick Moynihan as a favor to IBM. A $60m tax cut type of favor. I'm not saying Joe was right in what he did, but it is rather apparent that to be noticed by government, you must either be insanely rich or insanely violent.
What changed under Obama? Nothing Good
How are contractors realizing capital gains? Are they 'creating' software and then transferring ownership of it?
Nerd rage is the funniest rage.
I'm pretty left wing, but I lived through that insanity:
1. The IBM PC had just become a viable business computer
2. Firms had an incredible need for decent programmers
3. Decent programmers commanded pay 2-3 times what was then considered reasonable salary for a recent college grad (i.e. way outside corporate pay scales)
4. Firms had a hard time telling good vs bad programmers apart
so...
5. Firms hire programmers as consultants, pay them market wage, but have the ability to easily fire them by not renewing contracts
6. Programmers self incorporate because that is the only way firms are equipped to pay them
7. Programmers quickly realize that they can write off giant amounts of income as business expenses (travel, meals, home computers, video games, home office space, etc.)
then...
8. Law is passed to prevent this if basically:
a. You claim to be a sole proprietor, and
b. All your billing is coming from a single corporation (i.e. you are really an employee, not a consultant.)
IIRC, I avoided the law by forming a two person corporation with multiple billing streams.
The issue with this would impact someone who forms his own contracting firm and starts to deduct business expenses like getting from home to the job site, home office costs, etc... If he is later declared to be an employee, all those deductions get disallowed and he owes the back taxes. I suspect that, if he incorporated and paid himself mostly by distributions, he also paid his taxes at capital gains rates instead of the wage rates. That's a privilege restricted to lawyers, doctors, financial consultants, investment fund managers, and corporate officers.
Now, originally, the law's effect would have been balanced by the way that it kept companies like Microsoft and IBM from just making everyone a contractor to remove benefits, but the corporation quickly figured out that they could use temp agencies as a middle-man. It wasn't until a major lawsuit in the late 1990s that companies became sensitive to the idea that if it walks like a duck (employee) and quacks like a duck (employee), then it is a duck (employee) that can sue you for benefits. After that suit, many companies started brining contractors back on the payroll to avoid later class action claims.
Um, programmers, or anyone else CAN buy health care without their employers being part of the transaction. It's probably going to cost more because when we say that employers are "part of the transaction", that means they are paying for a large part of the transaction. There is no law that says you have to let them.
Um! Have you ever tried to purchase insurance for just you and your family? Cost aside, many insurance companies will NOT insure you. Why? Because the risk is there that you will use those benefits. Insurance companies expect that a certain number of employees will NOT use their benefits and generate enough profit to outweigh the expenses of those that do. And if you have ANY pre-exsisting conditions or you've ever smoked a cigarette in your lifetime, they will just flat out deny you any coverage no matter what the cost, as a matter of policy. If you do find some obscure insurance company that will cover you, you can bet your life (not just figuratively speaking) that it will cost you an amount much much more than an employee and his/her employer's contribution for that policy.
The other half of the equation is the $60m tax cut that was pushed by Senator Moynihan as a favor to IBM. You were clever and figured out a way to navigate the hurdle caused when congress had to find $60m to offset its favor to IBM (nice work BTW). The problem is, when there are a very few who can simply buy the laws they want via the legalized corruption of campaign donations, cleverness will not always be sufficient to overcome those hurdles.
What changed under Obama? Nothing Good
If you bill as an individual, 100% of the revenue (after expenses) gets hit with 15.2% ss/medicare tax. So you incorporate and instead of paying yourself a salary, the company issues a monthly dividend which is exempt from the 15.2% ss/medicare tax.
Sounds good, but there are 3 things to keep in mind:
Do you even lift?
These aren't the 'roids you're looking for.
Here is the deal - companies pay out money in a few different ways.
They can pay money to vendors for services rendered. Generally there is no tax on this, but it can't go to an individual directly, and it might be taxable by states/etc.
They can pay money to an employee - W-2 and all that. That is how 99% of the US population gets paid. The recipient pays income tax on that.
They can pay money to their shareholders in the form of dividends. The shareholders pay capital gains taxes on that money, which is a nice low percentage so that rich people don't have to pay taxes. There is also the issue of double-taxation, but most big corporations have so many tax shelters that they don't pay those anyway (just watch the Frontline episode on companies buying sewer systems in Europe and leasing them back to communities, and so on).
When you have a company of 1 you can elect to pay yourself in salary, or in dividends. The latter is FAR more beneficial tax-wise, although you first need to realize the money as corporate profits and pay corporate taxes on it. If you pay yourself as salary then chances are you won't have many corporate profits to speak of and so corporate taxes will be low (a salary counts as an expense on the balance sheet - a dividend does not).
The reason dividends are attractive is that before you pay them to yourself you can offset them with all kinds of expenses. Driving to your client pays for your car, any computer used mostly for work purposes is a deduction, lunch with the client is a deduction, and so on. Ordinary employees are expected to pay for their own commutes and pay taxes on that money at a much higher rate on top of that.
Hope that explains some of the nuances here. Disclaimer: I'm not a tax accountant, and I'm not an expert on this stuff in any way so a detail here or there might be off.
Aggregate infant mortality rate 6.3 per 1000 - 33rd in the world, same as Brunei, slightly beating Poland.
You're good at cancer survival - 9th, but not as good as the amount of money thrown at it would indicate. And the evil nationalised socialised medical systems of Netherlands, Italy, Hungary,Luxembourg,Slovakia,Ireland, Czech Republic and New Zealand, beat you.
Your national system spends more than 7000 USD per year per head - nearly 3 times more than in the UK, and a third more than the second on the list.
Your life expectancy is then the 11th best in the world.
Comment removed based on user account deletion
No. In the 1770's, the government taxed imports for its operating funds. It did not tax income. It was not authorized to tax income, and if you had suggested that they should do so at the time, likely you would have been shot, hung, or worse. Here's how it actually went:
The federal income tax was first enacted in 1862 to pay for civil war expenses on the part of the Union. They subsequently eliminated it in 1872; turned around again and revived it in 1894; and then finally it was declared unconstitutional by the Supreme Court in 1895. Then in 1913, the 16th Amendment put income tax into the "authorized powers" category, and that's where we are today.
I've fallen off your lawn, and I can't get up.
As the son of the IRS employee who was killed in this incident said, "if he [Stack] has a house and a plane he can pay his taxes." (Austin American-Statesman, 2/21/2010).
Corporations with multiple headquarters and Lear jets don't end up paying the taxes Joe was required to pay.
No it can't. Many many people, including yours truly cannot buy health insurance for any price. I am healthy, no pre-existing conditions, and have money in the bank. I am also gray-haired and unemployed. They won't take my money and I've tried and tried.
One man's freedom fighter is another man's terrorist. Always has been, always will be. What's more, the only way that that question is settled is by who wins the war. If the revolutionaries win the war, the Freedom Fighters stay Freedom Fighters. If the government wins, the Terrorists stay Terrorists.
Those who can, do. Those who can't, sue.
No, MA just makes you pay big tax penalties for not having health care. They don't provide you health coverage, though.
They set up group plans through private insurers, but you buy a plan through the state. They also expanded state aid for paying for the premiums. This means you can't be denied coverage or have to deal with pre-existing condition BS. The rates are also cheaper than normal open-market pricing.