Abraham Lincoln: Freedom and Taxes

lincoln

Abraham Lincoln is heralded as the president who made all Americans free and held the nation together through the ensuing Civil War; and while there is no comparison between slavery and taxation, most freelancers (and many individuals in the employed ranks) would agree that paying taxes can definitely feel like forced labor.  The government cannot force you to work, of course, but it can force you to turn over a portion of the profits of your toils.  This is especially true of self employment taxes, which is roughly double what you are required to pay as a regular employee since you have to make up for what an employer would match.  And do you know who you have to thank for income taxes?  That’s right, good ol’ Number 16:  Abraham Lincoln.

Lincoln was responsible for instituting the first Federal Income Tax to help fund the Union during the Civil War on August 5, 1861.  And though the saying goes that death and taxes are the two certainties in life, at the time the imposition of an income tax on U.S. citizens was highly questionable.  Lincoln even questioned his own authority to do so, and the income tax was attacked by numerous Americans in its early years.  A brief timeline, the dates and facts of which I gleaned from this Politico article by Andrew Glass:

  • 1861:  First Federal Income Tax imposed at a rate of 3 percent
  • 1872:  Congress repeals the income tax
  • 1894:  Congress revives the income tax
  • 1895:  The Supreme Court rules the income tax UNCONSTITUTIONAL
  • 1913:  The 16th Amendment makes the income tax constitutional

Somehow, I think they had it right in 1895.  I’m not wholly opposed to taxes; I think the government needs to be able to fund defense and infrastructure.  But I do think the evidence overwhelmingly indicates that our government wastes and misspends a vast fortune every day, and rampant spending drives taxes.

I’m not opposed at all to, say, a 3 to 5 percent income tax.  But paying nearly 20 percent on, say, a $75,000 income in 2012 is outrageous.  Fortunately, there are a few ways to minimize your self-employment tax burden as a freelancer.

How to pay fewer self-employment taxes as a freelancer

The self-employment tax rate is about 15.30 percent, 12.4 percent for Social Security and 2.9 percent for Medicare. Know the rules to avoid paying a pound of flesh to the tax man:

  • Make more than $110,100, and everything over that is only 2.9 percent for Medicare (Social Security is only taxable to that amount)
  • Only 92.35 percent of your income is taxable
  • You can deduct half of your self-employment tax (the portion that would typically be paid by an employer)
  • Schedule C baby!  Deduct everything you can, learn how depreciation works and apply it to your taxes.  Track all expenses all year so you can keep more of your money

Obviously, this isn’t a comprehensive list, and I am definitely not an accountant.  I strongly advise you to work with an accountant year-long, not just at tax time, to make sure you’re doing everything you can to keep your money.  What’s more, you should make estimated payments monthly or quarterly so you’re not slapped in the face with a huge, unexpected tax bill.

An accountant is not an expense, but an investment.  Consider this:  I recently had my accountant amend tax returns two years prior, and I went from paying a hefty tax fee to receiving a $5,000 refund.  Her fee?  $120.  And it’s tax-deductible.