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Small-Scale Question Sunday for November 5, 2023

Do you have a dumb question that you're kind of embarrassed to ask in the main thread? Is there something you're just not sure about?

This is your opportunity to ask questions. No question too simple or too silly.

Culture war topics are accepted, and proposals for a better intro post are appreciated.

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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.