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PaperclipPerfector  1yr ago (text post)   4498 thread views

Small-Scale Question Sunday for November 5, 2023

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In the US, unlike almost every other developed country, taxes aren’t (edit: universally) deducted by employers. Instead, employees are responsible for filing and paying their taxes. In a way, I don’t think this is a bad thing, it’s probably responsible for moderately more conservative American views on taxation (even if these aren’t reflected in policy).

In addition to federal income taxes (which range from 10% to 37%), there are also state and even municipal income taxes. Some states like Texas prefer to tax property or sales/goods instead of income. Some tax both property and income, or property, income and sales to varying amounts. At various times there have been both state and federal deductions for taxes paid to other jurisdictions. There was a big fight in the last (and start of this) administration about whether and to what extent state and local taxes could be deducted from federal taxes, which benefits high tax (blue) states at the expense of low tax (often red) ones.

What this means is that in some parts of the US - most notably NYC - high earners deal with tax rates that are actually very comparable to and sometimes even exceed those of most Western European ‘social democracies’ (approx 50% marginal rates). The US isn’t a ‘low tax’ society; in ‘lower tax’ states property taxes are often extremely high by global standards for example. It’s just a very rich society, even compared to Western Europe.

EDIT: Also, the US taxes globally. These taxes are deducted from local taxes where the US has a tax treaty (almost everywhere), so in the UK I don’t pay any American income taxes, but if I moved to, say, Dubai or Hong Kong I’d be liable for the full federal rate minus whatever income tax I paid locally. Anyone who makes more than $100,000 a year has to file, and even those who make less have to declare that they do so, provide their bank accounts and so on (of course the US government/IRS already has them, they force all global banks to report the financial data of any US citizen (which makes opening accounts abroad extremely painful), they just want to try to catch you out).

In the US, unlike almost every other developed country, taxes aren’t (edit: universally) deducted by employers.

That's not accurate - most employers certainly deduct taxes, and at least some legally obligated to do so. Well, at least each one I have been employed with did. But, if they under-deduct or over-deduct, it's not their or taxman's problem - it's yours.

Also, the US taxes globally. These taxes are deducted from local taxes where the US has a tax treaty (almost everywhere), so in the UK I don’t pay any American income taxes, but if I moved to, say, Dubai or Hong Kong I’d be liable for the full federal rate minus whatever income tax I paid locally.

This is the biggest shit ever and is basically the sole reason I do not want to move long term to the US to get a green card/citizenship.

Really, even considering all the benefits? Wouldn't you income be higher anyway?

In the US, unlike almost every other developed country, taxes aren’t (edit: universally) deducted by employers.

Every W2 employee has tax withholding which is usually pretty close to their actual owed taxes. The only way to avoid this is to be a contractor, in which case you will need to file payments of your estimated taxes as the year goes by.

You do engage with the income tax system annually, but that is to calculate your final actual taxes owed for the year. If that is less than you paid in via withholding, then you get a refund (this is the normal case), and if it is more, then you have to write a check for the remainder. If it is ever or routinely substantially more, perhaps due to side business activities or investments, then you may be required to make periodic payments of your estimated annual taxes before the end of the year. The IRS very much wants to be giving people a small but positive refund every year, and many people even consider it to be a "bonus" and plan around it.

Withholding is most definitely mandatory, and the IRS will be very unhappy with you if you try to dodge it or intentionally have less withheld than your expected taxes. I'm not sure where you got the idea that it isn't, but it's not true.

Universal Federal withholding was established in the US back in WWII, as a "temporary" measure to get the Feds money needed for the war effort sooner, and never removed. Some fiscal conservatives have advocated for removing it to actually force most Americans to write large checks every year, and thus save for them and make it more painfully obvious exactly how much they are paying. This is most likely a non-starter given how bad most people are at saving for such a high-magnitude future expense and how much effort would be needed to chase down everybody who accidentally or intentionally failed to save enough or otherwise dragged their feet. It's a pretty extreme position that nobody anywhere near actual power is prepared to touch. Pretty much everyone has since gotten in on the act of getting other entities than individuals to actually write the checks for tax payments, as it's much easier to coerce businesses than individuals.

In the US, unlike almost every other developed country, taxes aren’t deducted by employers.

Most W-2 filers do indeed have their taxes withheld by employers.

Sure but it’s not universal in the way it is elsewhere. Here, every single employee has taxes deducted automatically and the government even takes an extreme line against anyone ‘self employed’ who, say, has only one customer to try to pressure people into becoming ‘PAYE’ staff.

Almost every employed American engages with the tax system every year. Many employed Brits I know don’t regularly engage with the tax system at all except when the local council sends the (very small) property tax bill, which they calculate and you just pay (and you typically set it up for debit so that you’d only engage with them if you moved house).

How does it work in practice, though?

Since I'm a sole proprietor, I have to pay my own taxes, but it's a relatively simple deal - at the start of the year my accountant asks me what I assume my next year's income will be and after I make an estimate (typically estimating that it's somewhat more than in the past year), she sends me bills to pay the next year's presumed tax sum in six batches, ie. a batch every two months. Then the estimate gets specified throughout the year on the basis of my actual work, changes to taxation and, say, what deductions I'm getting, so this year I've had to pay a lot of taxes towads the end of the year. Then, when the tax office finalizes the previous year's taxation, if I've paid more than the actual final sum calculated on the basis of the year's actual income and deductions I get a rebate and if I've paid less I'll pay back taxes.

Simple enough, and the whole process means just a few added extra hours the accountant bills me per year, in addition to the usual processing of bills and invoices. In addition to national taxes there are local taxes, but those are all handled as a part of the same process, ie. the local tax rate (along with the assorted deductions) is just slapped on top of the national tax rate and the tax office processes all of it as a part of the same process.

However, every time the American taxation system is discussed, I get the feeling that even a normal worker has to do something infinitely more comples than this. Is it the state/local taxes and their effects? (Of course a normie worker won't need an accountant, but my understanding is that it would be possible for me to do it all myself without that much extra work if I was intent on saving money.)

The process for independent contractors in the US is essentially the same, except payments are made quarterly.

However, every time the American taxation system is discussed, I get the feeling that even a normal worker has to do something infinitely more comples than this.

Not really. The process is annoying, but it isn't actually anywhere near as difficult for typical filers as Americans make it out to be. For someone that has only typical employment income, they'll fill out a couple forms at their employer that allow the employer to withhold taxes based on their salary and marital status. Those taxes are withheld from paychecks. At the end of the fiscal year, the employee receives a W-2 form, which lays out what they earned and what they paid; this is information sent to the Internal Revenue Service. Using cheapie tax software (I used FreeTaxUSA this year), they can punch some info in to figure out whether itemized deductions make sense, but for someone with standard deductions, they can knock this out in about a half hour. The software will spit out whether the government owes you or you owe the government, then you file electronically and link your bank account to either withdraw or receive a deposit.

State and local taxes are typically similar.

Property taxes are typically billed by the locale and paid as a lump sum for the year, or quarterly payments.

Situations that become horribly complex and require a professional are typically involving business and investment considerations, which really do get comically complex with things like depreciation schedules. For someone that just makes $100K/year at their very normal job, buys a very normal house, and puts a bunch of money into index funds, I genuinely have no idea why they think taxes are hard.

For someone that just makes $100K/year at their very normal job, buys a very normal house, and puts a bunch of money into index funds, I genuinely have no idea why they think taxes are hard.

This isn’t hard, but depending on things like family structure and what state you live in, it can turn into a game of ‘how do I get the biggest refund from the government’, because A) the government likes to try to change middle class consumption patterns with subsidies paid out as tax refunds and B) most workers overpay from their payroll deductions anyways.

The one caveat I'll give is that filing taxes as a sole proprietor or self-employed worker can be fucked, even at fairly low incomes. In theory it's not the sort of thing that the IRS makes that much hay over unless you do something incredibly wacky, but there are some obnoxious penalties that can come up for stupid reasons.

For someone that just makes $100K/year at their very normal job, buys a very normal house, and puts a bunch of money into index funds, I genuinely have no idea why they think taxes are hard.

It's not hard, it's just tedious and needlessly stressful because you are manually copying data from form to form and a typo can (but often doesn't) result in a lot financial and/or legal pain.

The normal US worker will do very little.

Their employer will give them a small half sheet of paper called a W2. If this is their only income, they can file a 1040EZ which takes 15 minutes or so. If they have investment income, they will typically use software like TurboTax to file a 1040. This might add a couple hours depending on the complexity of the return

In most states, they will also have to file with the state, so add 50% to the time.

If you own a business, it's a nightmare. This is no different in Europe I assume.

Again, as a sole proprietor, my taxes and general business bureaucracy are quite simple. I pay my accountant on average maybe 100 € / month, a trifle compared to other costs.

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