My grandparents, like most of their generation, believed in giving their kids a spanking when discipline was required. Some spankings called for the willow switch, which hard-spanking parents never kept handy in the house. They always sent the kid out to pick one.
Dread surging, the about-to-be-spanked child walked slowly out to the tree, took about half an hour to select a switch, and shuffled miserably back to the house to meet the consequences. And if the switch selected was too small? Then the ultimate spanking would be that much worse.
Of course, the psychological torture of selecting the switch was worse than the actual punishment in most cases. It was meant to be. Give a kid a long stretch of time to think about the consequences of their actions, and they – at least in theory – are much less likely to repeat that particular transgression.
Every year about this time, hard-working American citizens take part in a switch-selection ritual of their own. This so-called Income Tax Day – misnamed because most people pay so much in taxes over the year that they actually get money back – is the day Americans have to sit down and tell the government just how big a switch to hit them with.
And if the switch is too small, well, you’ve all heard the “penalties and interest” litany.
Most people filing have employers who pay them wages and issue them W-2’s. Many of those people have fairly simple taxes: take your earnings, calculate how much you should have paid, subtract from what you actually paid, and there’s your refund. Many people have kids, houses, or other sources of large deductions. This complicates the math a bit, but it’s still manageable for most – especially with the advent of computer- generated tax return filing.
But then there are the people who own businesses. They employ themselves, probably a few others. They may have partners, or shareholders. Sole proprietors, partnerships, and partnership-like entities (LLC’s, in particular) enjoy the fresh hell of taking all their business-related activity, crunching the numbers, and then feeding it into their own tax returns.
A few years ago I formed a small business. I started off as a sole proprietor, eventually moved to a corporate entity. The complexity of my return was so great I had to pay a professional accountant to assist me. Compared to most business my size, my returns were fairly simple. I had no employees to account for, no depreciation to calculate, no “targeted” tax credits to document. But just the simple question of what I paid myself and how required me to consult a professional tax advisor – someone who spent their career studying the tax code – so that I didn’t run afoul of the self-employment taxation rules, the FICA contribution rules, and whatnot.
I’ve got a law degree, and I couldn’t figure out how to manage the tax end of my relatively simple business without siphoning off a substantial chunk of my profits. How is the average joe supposed to figure it out? The answer is the same – hire a person whose primary contribution to the economy is navigating the tax code.
In the last tax year, I’ve joined up with another former sole proprietor to form a two-person law firm. Again, we currently have no employees, he have no significant capital expenditures, no large benefit plans, or any of the other things that make business tax returns excruciatingly complicated. Nope. We’ve just got the one thing – there are two of us.
If moving from employee to sole proprietor is, say, five times as complex for tax purposes, then moving from one person to two is as difficult as you might imagine. Not by a factor of ten. I’d say it’s more like twenty. And it’s only going to get worse, assuming that we succeed and grow. Ultimately, we hope to add staff, which means capital expenditures, payroll taxation, and lord knows how any benefits plans would work in the tax scheme.
The more successful we become, the bigger the switch we have to pick out.
And it’s not so much the money we have to pay to the government – although that can and should be a lot lower than it is – it’s the sheer dizzying strangeness of the way we have to think about our business decisions. And as a lawyer, I’m usually pretty comfortable thinking about things in strange ways. Not when tax time comes around. It fills me with dread, even if I’m getting money back. And judging by the lines at the post office, most Americans feel the same way.