The IRS estimates that more than 30,000,000 U.S. taxpayers have some sort of tax compliance or collection problem.
But by far the most frequent and serious problem we see is the self-employed taxpayer who has failed to file his tax returns and/or has failed to pay any taxes to the IRS during the year.
So why are self-employed people more likely than others to run afoul of the tax laws?
This post answers that question.
“I Just Love Being My Own Boss. I Can Do Whatever I Want”
Self-employed people are their own employers.
Consequently, in order to be successful they must be disciplined enough to,
- Take the time to learn the law (or hire someone who already knows it); and
- Set up a bookkeeping system that will allow them to comply with the tax laws.
This is easier said than done.
First, many self employed people while skilled and talented in their trades, have little or no training in finance.
To make matters worse, most of them loathe doing paperwork and avoid dealing with it at all costs.
This mixture of unaccountable autonomy, lack of training, and aversion to paperwork is like combining nitroglycerin, TNT and fulminating platinum in a jar and shaking it.
It’s bound to explode.
“Honey, I Can Handle the Bookkeeping”
Self-employed men make up a good 90% of the small business owners who come into our office with tax problems; therefore, this post addresses their problems.
(Incidentally, self-employed women seem to do a much better job of keeping their books and records and complying with the tax laws.)
Sometimes the self-employed man acknowledges that he needs to have someone else handle the bookkeeping and tax compliance functions of his business. This recognition is 80% of the battle.
But then he goes and blows it by assigning those duties to his well-meaning, woefully over-pressured and underqualified wife.
Let’s face it, wives are capable of accomplishing all sorts of amazing feats, but this one is well beyond their reach.
A marriage license and a devotion to your husband are poor substitutes for a CPA certificate.
Unless your spouse is an accountant or has significant bookkeeping and tax compliance experience, do yourself a favor and keep her out of the business.
Hire someone you can fire without destroying your marriage and making your children hate you.
“Look at the Bank Statement, Honey. We Finally Have Enough Money for a Boat”
Self-employed taxpayers often fail to segregate their business finances from their personal finances.
This is the kiss of death.
First, the commingling of business and personal funds makes it very difficult to monitor and account for the cash flow needs of the business.
Second, when the taxpayer sees a large amount of cash in his bank account he has a tendency to believe that it’s his money to spend any way he chooses.
While this might be technically true, it is almost always a delusion.
In the overwhelmingly majority of cases, the self-employed taxpayer has not yet paid his income taxes (and sometimes even his payroll taxes).
He should be setting aside (if not literally, at least in his mind) 15% to 30% of his cash-in-bank depending on what income tax bracket he is in..
Here is what we have our self-employed clients do:
- Put themselves on the payroll at a wage rate sufficient to cover their basic living expenses (i.e. no luxuries); and
- Set up a separate business bank account and never again think of that money as their own.
Related Posts and Links: