This sounds like a mess to keep proper tax records for. Assuming nobody's giving receipts on either side of the transaction, how do you keep proof of what price you paid and what price you sold for? Audits aren't that rare.
Not speaking for this individual in particular but in general its unlikely that businesses like this are going to report all of their earnings, are they? You can audit a cash business but with no receipts whole transactions never happened or have a paper trail.
I'm not condoning tax avoidance but remember most of the people on HN either earn six figures a year, will do in a few years and/or building startups that might be worth $millions.
This guy is making $15-30/hr, doing part-manual labor and has 4 kids and a wife to feed.
I guess it's a moral judgement but I feel less concerned if he was to not run all of his cash payments through his books compared to bankers and millionaires who put large amounts of money offshore to avoid tax.
At the same time, in that income range with that family, his taxes are gonna be 0-10% of his profits at most... without the threat of being imprisoned for tax evasion. If his "typical summer week" is his typical week all year, he alone is already earning more than the median household income for this country... lots of people are self-employed making similar income without benefits. Is it morally OK for a plumber to not report his income? An electrician? What's different about a CL arbitrage business?
Payroll taxes are 15.3% with no deductions. 0-10% on federal sounds about right, but that is not really an accurate picture for what taxes would do to his cashflow.
I agree that it is not morally OK to not report income.
I put in my own numbers for a complicated personal return (business income, capital gains, itemized deductions, etc) and the forecaster agreed with my actual taxes done by a CPA, so it's not making any guesses.
Put in married, $45k in business income, 4 kids. The total federal tax bill comes out to $3700 or 8%. Most of the tax bill was offset by the large EIC for having kids. In reality he'd have many deductions to lower that even further, from business use of a home, to any health insurance he buys, to part of his car expenses and mileage...
If the guy has $45k in business income, then he owes $6885 of payroll taxes (unless he is Amish). I don't care what tool you use, that number is the absolute floor for what he would have to pay out of pocket.
* 61: Add lines 55 through 60. This is your total tax.
* 62-72: Credits and payments, including the Earned Income Credit.
* 76: AMOUNT YOU OWE: Subtract line 72 (total credits) from line 61 (total tax).
That's where his $6.3k SE bill gets nearly wiped out by $5.5k in earned income credit.
Credits, unlike deductions, are subtracted dollar for dollar from total tax owed. If he files jointly with a spouse, it can actually reduce their tax bill to $0 on that income. There's no category of taxes that can't be reduced by EIC, including SE (payroll) tax.
But he gets those credits whether or not he reports his profit. On a cashflow basis, it will cost him 20%. You are right though, his tax bill at the end of the year would be about 8% of $45k.
All good points. Part of me, in making my overly-simplistic moral argument, is assuming that his summer months are reflective of seasonal fluctuations and not a consistant representation of his income.
I was just reading a long comment thread about craigslist on reddit yesterday. It seemed like most transactions take place over the phone, not e-mail. Whoever calls first at the right price gets the stuff, a good deal will be gone before the e-mail would be read.
Every one I've been to has a POS computer/register where they enter every sale, no matter how it's paid. Enter the employee ID of the person that did the cut, the service, cash tendered, money drawer opens, provide change if applicable, offer receipt. Same as any other legit business.
There's a grey market in "zappers", which are POS devices that keep two sets of books automatically. Lots of small retail businesses rely on this type of tax fraud to stay in business.
