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

174 points by mikecane 16y ago

larsberg 16y 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 16y 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 16y 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.
  - kevinpet 16y 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 16y 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 16y 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.
    - chopsueyar 16y ago
      ...or 1099s being liable for more taxes.
  - alanstorm 16y 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)
- kls 16y 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.
- jharrison 16y 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 16y 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 16y 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).
- jharrison 16y 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 16y 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 16y ago
  More likely he has a Hobby not a business http://www.irs.gov/irs/article/0,,id=186056,00.html http://www.irs.gov/irs/article/0,,id=186056,00.html
  - smackfu 16y 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 16y 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 16y 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.
cullenking 16y 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 http://news.ycombinator.com/item?id=1837299
- cullenking 16y ago
  I just sent him an email with this post, hopefully he'll have ten minutes to add some wisdom to the conversation.
DanielBMarkham 16y 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 16y 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.
  - pinksoda 16y 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.
grandalf 16y 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.
- chopsueyar 16y 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."
- smackfu 16y 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 16y 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 16y 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 16y ago
  Try Nolo Press: http://www.nolo.com http://www.nolo.com They have a lot of good, basic information explained well.
- space-monkey 16y 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!
pinksoda 16y 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 16y 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 16y 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!"?
- gallerytungsten 16y ago
  If he had incorporated, absolutely. From the context of his blog, it seems he didn't.
  - cheald 16y 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.
    - ars 16y ago
      I'm 100% sure. You can deduct all expenses including medical insurance for yourself.
    - gallerytungsten 16y ago
      While it's correct that you can do a Schedule C on your personal return, being incorporated makes your position a lot stronger.
camz 16y 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 16y 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.
duffbeer703 16y 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.
dmfdmf 16y 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.
- dotBen 16y 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.
  - dmfdmf 16y 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.
jackfoxy 16y 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.
- moultano 16y ago
  What do you propose instead? A link is fine.
  - ars 16y ago
    I assume he wants consumption (i.e. sales or vat tax) instead of income tax. Google "fair tax" for one such proposal.
    - Locke1689 16y ago
      This doesn't seem to make sense to me as it almost seems a reverse progressive tax. People earning just enough to get by will be spending almost 100% of their income on goods, thus having a very high VAT tax as a proportion of their income, while people in the very high income brackets tend to spend far less on actual "goods" as a percentage of their income. My family, for example, puts far more money in the stock market than they do in groceries every month.
      - ars 16y ago
        Eventually the money gets spent. Might not be right away, but eventually. You have to tax services as well for it to work though.
arron61 16y 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 16y ago
  Turbo Tax is also an option. It correctly handles this sort of income.
codexon 16y 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 16y 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?
- kls 16y 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.
- dotBen 16y 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.
kevinpet 16y 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 16y 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.
chopsueyar 16y ago
Some 1040Xs?
tocomment 16y ago
What is he talking about? If he paid taxes on the incomewhy do they think he owes them?
daimyoyo 16y 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 16y ago
  The IRS is at least generous enough to let you make that quarter tax-free.
frankus 16y 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).

174 points by mikecane 16y 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 16y 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 16y 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.
- kevinpet 16y 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 16y 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 16y 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.
  - chopsueyar 16y ago
    ...or 1099s being liable for more taxes.
- alanstorm 16y 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)
kls 16y 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.
jharrison 16y 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 16y 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 16y 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).
jharrison 16y 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 16y 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 16y ago
More likely he has a Hobby not a business http://www.irs.gov/irs/article/0,,id=186056,00.html http://www.irs.gov/irs/article/0,,id=186056,00.html
- smackfu 16y 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 16y 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 16y 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.

cullenking 16y 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 http://news.ycombinator.com/item?id=1837299

cullenking 16y ago
I just sent him an email with this post, hopefully he'll have ten minutes to add some wisdom to the conversation.

DanielBMarkham 16y 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 16y 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.
- pinksoda 16y 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.

grandalf 16y 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.

chopsueyar 16y 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."
smackfu 16y 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 16y 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 16y 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 16y ago
Try Nolo Press: http://www.nolo.com http://www.nolo.com They have a lot of good, basic information explained well.
space-monkey 16y 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!

pinksoda 16y 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 16y 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 16y 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!"?

gallerytungsten 16y ago
If he had incorporated, absolutely. From the context of his blog, it seems he didn't.
- cheald 16y 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.
  - ars 16y ago
    I'm 100% sure. You can deduct all expenses including medical insurance for yourself.
  - gallerytungsten 16y ago
    While it's correct that you can do a Schedule C on your personal return, being incorporated makes your position a lot stronger.

camz 16y 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 16y 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.

duffbeer703 16y 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.

dmfdmf 16y 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.

dotBen 16y 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.
- dmfdmf 16y 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.

jackfoxy 16y 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.

moultano 16y ago
What do you propose instead? A link is fine.
- ars 16y ago
  I assume he wants consumption (i.e. sales or vat tax) instead of income tax. Google "fair tax" for one such proposal.
  - Locke1689 16y ago
    This doesn't seem to make sense to me as it almost seems a reverse progressive tax. People earning just enough to get by will be spending almost 100% of their income on goods, thus having a very high VAT tax as a proportion of their income, while people in the very high income brackets tend to spend far less on actual "goods" as a percentage of their income. My family, for example, puts far more money in the stock market than they do in groceries every month.
    - ars 16y ago
      Eventually the money gets spent. Might not be right away, but eventually. You have to tax services as well for it to work though.

arron61 16y 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 16y ago
Turbo Tax is also an option. It correctly handles this sort of income.

codexon 16y 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 16y 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?

kls 16y 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.
dotBen 16y 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.

kevinpet 16y 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 16y 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.

chopsueyar 16y ago

Some 1040Xs?

tocomment 16y ago

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

daimyoyo 16y 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 16y ago
The IRS is at least generous enough to let you make that quarter tax-free.

frankus 16y 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).