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Paying taxes vs. not paying taxes
I know this has been brought up in other threads but I need a clearer answer as to my situation. I work in a small club where the only thing they recorded was my drivers licence. I don't pay house fee and I work for tips (I am an indepdent contractor who does not get paid by the club). I am saving about $200 a week and have added that to almost 10,000 in a year. I'm wondering, if I don't pay taxes, how big is the chance I will get caught because of my savings account? I know it sounds stupid to not pay taxes, but I would really rather not. Is it going to affect when I buy a house or car? I apologize for sounding naive but I just got into this business and have no idea how taxes and the IRS really work.
Thank you in advance for your replies.
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Re:Paying taxes vs. not paying taxes
The IRS will know. Your bank will report the interest you earned to them.
Nobody likes paying taxes (it's worse than house fees!) When you go to buy a house, they are going to ask for a recent tax return. If you do a "no doc" loan, you will need 20% down. They will wonder where you got that money from.
You probably could avoid paying taxes if you lived under the radar, but that would mean never owning anything worth over $10,000 and never being able to put money in the bank.
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Re:Paying taxes vs. not paying taxes
Icechic, there is one particular legal school of thought which says that if a person has never voluntarily filed a tax return that they have also never acknowledge/voluntarily agreed to pay income taxes. Obviously the IRS holds a very different opinion on the voluntariness of paying income taxes, and typically charges people who try to get away with the "voluntary" argument with say 15 years in prison and a $100,000 fine.
Be that as it may, since you already have a bank account which has increased by $10,000 over the past year, a fact which will be automatically reported to the IRS by your bank in the form of a 1099 interest report, the IRS computers already have enough info about you to be cross-checking for the fact that you will be filing a tax return. If no tax return appears by April 15th with the same name and social security number as provided by the bank on their 1099 report of interest income, I'd say it's highly likely that the IRS will come knocking on your door at some point.
Also, if you were to buy a car, the fact that a title transfer took place involving your name and social security number will automatically be reported to the IRS by the state agency that issues titles. Similarly, if you were to buy a house, the fact that a real estate deed transfer took place involving your name and social security number will also automatically be reported to the IRS by the state agency that records property deeds. In both of these cases, IRS computers are going to cross-check for previous tax returns in your name and social security number, trying to compare the amount of money that you previously reported as income versus the amount of money you spent as a down payment on your new car or new house as well as comparing the amount of money you previously reported in annual earnings versus the monthly payments required for the loans on your new car and/or new house.
If you choose not to file a tax return, or if you choose to massively under-report your actual income to the point where your reported income is clearly not sufficient to explain how you are making your car loan or mortgage payments, not only would you be facing claims for underpayment of taxes on previous income, but you may also be facing criminal charges for tax evasion. I don't mean to scare you, but for a fact the IRS just announced that they are hiring over 2000 new auditors for the express purpose of cracking down on people who fit the "profile" of tax cheats. People who are working as independent contractors in a business where they are paid in cash (i.e. exotic dancers) are pretty high on that list.
Because of all of the automatic income and transaction reporting that now occurs between the IRS and various state agencies, financial institutions etc., today it's virtually impossible to avoid filing and paying taxes without eventually being caught. "Flying below the radar" of the IRS automatic income reporting now typically involves the following reporting thresholds ...
#1 - never deposit more than $3000 in a single bank account
#2 - never ever open an investment account/IRA with a brokerage house
#3 - never take out a car loan or buy and register a car worth more than $3,000 book value
#4 - never buy a home
#5 - never purchase money orders totaling more than $1,000 on the same day
#6 - never spend more than $3,000 on anything at a major retailer
#7 - never open a checking account which will show more than $3,000 of deposits and check written in a single year
#8 - never apply for an unsecured credit card (secured cards with a $300 limit are OK though)
If you follow #1 through #8 above in order to avoid the possibility of attracting unwanted IRS attention, you are basically dooming yourself to a life of "shadow existance", where you can't ever own a house or a nice car, where you'll have to save the money you earn under your mattress, where you'll be paying all of your bills with money orders, etc. because you may risk going to jail if someone asks the question "how did you earn the money to pay for this" and you can't show them a tax return substantiating that income. This new IRS automatic reporting is an outgrowth of 9/11 and the ensuing Patriot Act, intended to identify and stop "money laundering" by terrorists, but it is also highly effective in locating tax evaders and it is NOT going to go away.
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Re:Paying taxes vs. not paying taxes
Is it a good idea to hire an accountent for this? My dad usually does my taxes but he doesn't know I dance, and I'd like to keep it a secret from him. Do you guys actually report the full amount you earn? Or do you report more like 75%? I would like to save a good amount of money (like I previously stated) and buy a house one day, so I want to get this right.
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Re:Paying taxes vs. not paying taxes
Sorry, one more question:
How do you guys prepare at the beginning of the year for next years filing of taxes? Do you have all receipts and record your income? Do you put money aside guessing how much tax might be? I live in New York and have no idea what I should do to prepare.
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Re:Paying taxes vs. not paying taxes
Personally I use the program TurboTax for Home and Business to prepare my own tax returns. I report all of my income as the law requires, but I also deduct all of my "business expenses" which the law allows (travel and accomodation expenses, stage fees and tipouts, costumes and shoes, my website, computer and cable modem, second phone line, breast implants etc.).
I have know of dancers in the past who have been "creative" with the actual amount of income they reported. However, with some of the new laws now in effect, it is very possible that at some point the IRS may decide to poke around the business records of the club you are working at. This in turn might uncover club records including such info as how many nights you worked last year, how many private dances you sold on each night that you worked last year etc. If this were to happen, these club records could be used as a basis for the IRS to charge you with under-reporting your income.
I don't work/dance full time anymore, so I estimate my federal taxes at 26%, I estimate my NY state taxes at 6.5%, and I estimate my NYC taxes at 2.5% . This effectively means that every week I take 35% of whatever I have earned and stuff it in my safe. Then every 3 months I take that money out of the safe, split it up between the IRS, State and City of New York, cut three checks, and also make out the one page estimated tax forms and mail them in along with the checks. When I file my actual tax returns in April, the amounts which I have previously sent in for estimated tax payments get subtracted from the amount I'm required to pay in along with my tax returns.
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Re:Paying taxes vs. not paying taxes
I also live in New York. I put aside money for estimated taxes and cut a check to the IRS, the States of NY and NJ, and the City of NY every 3 months (June 15th, Sept 15th, and January 15th - just sent out some whopping big checks earlier this week in fact). Then by April 15th I file my federal tax return with the IRS, my state tax returns with NY, NJ and whatever other states I have worked in during the previous year, and also file a City of NY per-diem income tax return if I have worked in NYC clubs during the previous year. However, in April, instead of cutting estimated amount checks I cut actual amount checks based on the difference between the estimated tax payments I have made since the previous April 15th and the actual amount of tax that my returns say I'm required to pay.
As far as financial records, I keep a yearly journal where I write in my earnings on one side and my deductible expenses on the other side - a simple double entry ledger. I also file my receipts for any bills or expenses which will be deductible as business expenses.
If you're a fairly intelligent girl, you'll do fine with just the TurboTax for Home and Business program. It's available at and also at all of the big retailers that sell software. Make sure you get the Home and Business version since you'll need to file Schedule C (profit or loss from a business). The least expensive home only version does not have this capability (it's geared to people who receive paychecks), and the most expensive version includes stuff for corporations, LLC's etc. which you do not need.
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Re:Paying taxes vs. not paying taxes
Do you know where I can find out how much estimated tax I should be putting away? Like what the percentage is based on how much I take home? I looked at W-2's from other jobs and figured a base percentage of around 16% ( I live and work outside NYC). Does this seem correct to you?
Thank you for your advice with everything by the way.
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Re:Paying taxes vs. not paying taxes
If you're averaging about $1000 a week in earnings, and if you are single, then a 16% federal tax rate and a 4% NY state tax rate are pretty reasonable. However, if you are averaging more like $2000 a week in earnings, and you are single then a 25% federal tax rate and a 6% NY state tax rate would be more like it. And as Geek always reminds me, since you're an independent contractor you'll also have to add another 7 1/2 % or so in self-employment tax (this tax is equivalent to the Social Security taxes withheld from people who are employees and receive paychecks) on top of the federal and state income tax percentages. There are of course a ton of other variables involved in arriving at your actual tax rates, such as your interest earnings, business expense deductions etc. Once you've actually calculated and filed a tax return, you'll be able to back-calculate the actual percentages you wound up paying for federal, state and self-employment taxes and use these more accurate figures when calculating your estimated tax payments from June 2004 through April 2005.
The easiest thing to do is avoid the guesswork and simply pick up a copy of TurboTax for Home and Business at your nearest Staples or even WalMart. Keep the receipt though because this is a tax deductible expense LOL.
I'm also glad that you don't work in the city of New York. Scuttlebut has it that the city tax department is going to be in serious bloodhound mode this year regarding their per-diem income tax, starting with professional athletes who play games in NYC and eventually trickling down to dancers working in well known high paying upscale NYC "show clubs". Under the NYC per-diem tax law, people are liable for income taxes on money they earned while working in NYC even if they live and usually work in another state, and apparently the NYC Tax Dep't is now prepared to start following them home in order to collect NYC's "piece of the pie" ! With professional athletes being paid $10,000 and up PER GAME, and with some dancers in the well known upscale "show clubs" purportedly earning $4,000 or $5,000 a week, the NYC Tax Dep't knows that there is a LOT of money at stake for them in the form of previously uncollected NYC per-diem income tax. Of course, with the information sharing agreement now in place with the IRS and some 40 states, it's a sure bet that any info the NYC Tax Dep't turns up will be automatically shared with the IRS and the tax department of their home state as well.
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Re:Paying taxes vs. not paying taxes
icechic - Melonie has given you some great advice and yes, going to an accountant is probably a good idea. The CPA can probably show you additional ways to save taxes and put your money to work for you. Something like Quicken or Money is probably all you need to track your income and expenses.
As to "staying below the radar", the truth is that ultimately everybody pays for that. I'm sure when the government proposes tax rates and the like, they know that the average return has unreported income or inflated expenses and that many people who don't file should be filing. If everyone was 100% honest with their income/deductions and everyone who should file did, tax rates would probably be significantly lower.
Which is a long-winded way of saying "I'm paying my fair share of taxes, what makes you special that you shouldn't?" And I'm not specifically referring to you, icechic, just anyone who thinks that cheating the system for their own personal gain is a good thing.
End of rant.
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Re:Paying taxes vs. not paying taxes
I agree with NVJosh that using an accountant to help you organize and file your first tax return is actually a very good idea. Particularly where an independent contractor sole proprietor business is concerned, an accountant can help point out potential business expense deductions that you personally may not have thought of, as well as help you develop the necessary mindset which will help you minimize your taxes in future years. However, entering your own financial information into TurboTax yourself, and then taking the disk to your accountant, will save him time which saves you money !
In regard to "paying my fair share" of income taxes, I'm a firm believer in not paying one dollar more than the law requires ! In fact I go to great pains in managing my investments to reduce my tax liabilities in any legal way possible.
However, the "good old days" of a dancer earning $100,000 a year in cash, not filing a tax return, putting away tens of thousands of dollars in bank and investment accounts, and still being able to buy a nice car and a house are ancient history (like 1980's - before my time). With today's IRS automatic reporting requirements, and with computers powerful enough to match up the savings and expenditures side of everybody's equation with the reported earnings side necessary to finance those savings and expenditures, people who do not file tax returns today are simply begging to get busted for tax evasion !
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Re:Paying taxes vs. not paying taxes
Just an add in to Melonie and Josh.
Remember that for you to fly sucessfully under the radar, everyone YOU know has to fly above it and pay taxes. Any one you know (or even piss off) can turn you in to try to lessen their penalties or just for spite.
It is like driving a car without a license when you know they are setting up road blocks to catch drunk drivers. Sooner or later a fender bender will expose you. Hell hath no fury like a tax man (with a computer) scorned.
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Re:Paying taxes vs. not paying taxes
Melonie - I don't want to pay any more than I have to pay in taxes either. If I had legitimate deductions that reduced my taxes to zero each year, more power to me. However, I get clients who make a million dollars and say "I don't want to pay more than $50,000 in taxes this year." My normal response is "Well, accounting fees are deductible. That will help reduce your tax bill." I mean, come on...I can do a lot with the tax code, I'm just not a miracle worker.
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Re:Paying taxes vs. not paying taxes
And please...please...do not bring your yearly receipts in a shoebox! :o
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Re:Paying taxes vs. not paying taxes
If staying"under the radar" is really what you want to do, check out this ------------------EXCELLENT BOOK!!------------
How to Be Invisible, Revised Edition : The Essential Guide to Protecting Your Personal Privacy, Your Assets, and Your Life Written by J.J. Luna
Published by Thomas Dunne Books (March, 2004)
ISBN 0312319061
Price $23.95
I own the 1st edition of the book...ity's full of First Rate Safety & Financial tips--not the standard "open an LLC in Nevada or Delaware" junk.
I'd recommend this book to anyone hiding from an abusive ex, hiding their assets from lawsuit crazy nuts, or who just believes that one's personal life is just that-personal!
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Re:Paying taxes vs. not paying taxes
I heard once that the majority of IRS audits are started by a tip from someone (not generated by their own findings)...is this true?
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Re:Paying taxes vs. not paying taxes
Where dancers are concerned, a good portion of the IRS audits I have heard about have started with the IRS being drawn to investigate a club's books under circumstances similar to the Galardi club matter which is now hitting the national news. Once the IRS has the opportunity to closely examine the club's financial records, it is then a super simple matter to pull out the club's job application file, the club's records of dancer scheduling and/or private dance and VIP room percentage splits, local dancer's license information (if applicable), and then start checking previously filed dancer tax returns.
I have also heard of audits being initiated by dancers making big ticket purchases i.e. registering a new BMW.
In regard to the IRS being "tipped off", this is now an even bigger issue than it ever was. Thanks to the recent 40 state information sharing arrangement with the IRS, this year it will be a matter of routine for state and local investigations to automatically forward information to the IRS. I am particularly concerned that this new information sharing arrangement is going to turn up a lot of "dirt" as greedy local investigators (i.e. the New York City per-diem income tax dep't) start turning over rocks in search of extra revenue for the city, which has a severe budget deficit.
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Re:Paying taxes vs. not paying taxes
Shocking as it sounds, there is much to be said for over-paying your taxes.
Yes, you read that correctly. Over-paying.
Let's say you make $1000 a week on average your first year of dancing, being finanically responsible enough to save 25% of that every week, rain or shine. Figuring for the occasional vacation and bad week, you'll make perhaps $46k that year. 16% plus 4% plus 7.5% subtracting adequate deductions equals a tax burden of approximately $7,850.
A tax receipt is perhaps your best indicator of income to a mortgage company or anyone else from whom you wish to get credit. I am not sure if your local companies prefer to deal in gross earnings or simple net profits but, respectively, those income figures will get you a loan of $175,100 or $145,200 (and I am sure that 20% of that will be no big stretch to you, with your ample savings habits).
BUT.
Most dancers find that their income goes up after the first year- the "learning" year, if you will. As your skills improve, so do your profits. With adequate proof of income and savings history, most banks will accept 15% or even 10% for a down payment. The area you are looking into may perhaps be a bit more expensive than your top loan amount of $175k, or perhaps you would be interested in investing for the future by purchasing a modest starter home ($125k) as well as a rental home property ($40k plus $15k in improvements). An increase in income, typical of a more seasoned dancer, for a person of your financial responsibility means that you would be able to afford these expenses. However, you would not have the tax receipts to gain such loans. Over-estimating your income and paying the extra taxes would make such an investment possible.
In short, an extra $2k or $3k in taxes now could reap added financial payoffs in the form of better credit, rental incomes and mortage interest (tax deductible!). It only need be done once, in the year before your expected purchases. It also illustrates just how useful saving receipts are, as deducting every penny possible means that you can file for more than you made without having to send too much extra to the tax man.
Most of you likely know, but for those who don't: you are not allowed to owe more than 40% of your income (gross or net, depending on your area) in outstanding debt/loans. Not more than 32% of this can be in the form of a mortgage. Frugal people with no debt can easily afford to pay 40% or even 50-55% of their income, but even if you CAN pay it they won't let you owe that much. The easiest way to get around this is to inflate your income and pay the resultant taxes (making loan companies think you're paying 31% when you're actually paying 44%, which is perhaps what one can afford). If done properly (don't try to bump yourself up three income brackets, as the tax burden would be too high to be profitable), this money will come right back in the form of deductible mortgage interest and rental incomes.
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Re:Paying taxes vs. not paying taxes
LOL, Lilith aka Financial Hooligan.
I personally am glad you are not working for Enron or Parmalat. You describe an arcane way to scam the system but left out some of the good parts. First, the financial institution will probably want to see some bank statements. That is certainly a way to get tripped up. Second, once approved for the loan, you file an amended return. Of course the amended return has to be fully supportable and the inflated figure you filed originally has to be a "mistake" such as a clear double counting of an income, or if figured off the net "forgetting" a perfectly valid deduction. Oops there is a third factor--It is bank fraud, for which you can go to jail. And the affadavits you sign on the loan application probably have a perjury component to them.
PS Lilith, the above was sarcasm, but I have to give you credit for a very entertaining post. If nothing else it does give a valid reason for people living in the daylight and paying taxes.
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Re:Paying taxes vs. not paying taxes
Monty~
Considering that she manages to save around 20% of her gross income (far and above what most Americans manage), I think bank statements will be quite adequately covered. A mere $3500 overinflation of her income would result in $13,400 extra in loans (approximate, not a firm quote) while paying a paltry few hundred, tops, in added tax burden. And she should certainly NOT try to amend her return; if one wants to overinflate their income and pay extra taxes, then one should let well enough alone. I am fine with paying extra taxes for added perks, but let's not have our cake and eat it too. Same for inflating your income for the sole purpose of getting a loan which you cannot afford. That's just stupid.
Ho, Captain Financial Hooligan strikes again!
*swoosh*
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Re:Paying taxes vs. not paying taxes
Lilith...interesting theory.
But how about this one...
Report your income as your normally would.
When you buy a house, get an inexpensive fixer-upper, but something you can live in for a few years as well.
Fix it up with dancing income (interpret this how you like)
Pay off your mortgage (with reported income, of course!)
Then sell. You will be able to use that equity as the large down payment on the house(s) you really want (or do another fix-erupper and repeat the process.) You also get the benefit of the appreciation being tax-free. You will be able to finance the remaining balance with another mortgage based on your true income.
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Re:Paying taxes vs. not paying taxes
Emily~
Let it never be said that there is anything wrong with the old tried-and-true. However, saying (and paying taxes on) you have an income of $49,500 instead of $46,000 can get as much as $13,400 in extra loans. That's a mere $191 (or thereabouts) in monthly payments. So if you:
1) Have no debt.
2) Are financially responsible.
3) Expect an increase in income
and
4) Can afford it.
... then I see that it would be a boon to your financial estate. $13k can do a lot in some areas of the country. Beaumont, Texas has homes with good rental potential selling for a mere $28k. Someone with ten years of dancing left in their career could see some serious compound interest from a rental property which is seven years old.
And I'm certainly not advocating over-payment for the purpose of a flashy home. In my original hometown, a starter home was $50-70k. It's double that for a safe neighborhood in the town which I currently reside. Anything above a basic starter home (including a basic home in a NICE neighborhood with good appreciation) would require a loan approaching $175k, which leaves little money left for property investments (my preferred venture). She obviously would find this information totally unnecessary if she is from an area as inexpensive as my hometown, for which $140k in loans is plenty for a starter home in a nice neighborhood AND rental property AND improvements. The tried-and-true would be far less hassle and expense (digging up as many deductions as possible so you can afford to pay taxes on $49,500, actually PAYING taxes on $3500 of income which you didn't see... it's a useless notion unless you can put it to work for you).
*swoosh!*
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Re:Paying taxes vs. not paying taxes
Quote:
Originally Posted by Lilith link=board=6;threadid=5845;start=msg64213#msg64213 date=1074456473
Emily~
Let it never be said that there is anything wrong with the old tried-and-true.
What I suggested is a little different than the old tried-and-true. It's going on something you said...the idea you will make more money later on which you can funnel into real estate.
The important part is that you will have to rely on a mortgage payment AND home improvement costs, the latter of which lenders won't take into consideration. If you are not being completely legit and you pay your contractors with cash, you can also benefit that way.
For example, let's say you report $25,000 and buy a $50,000 house. Over the course of 4 years (because you are making a lot more money), you pay down the mortgage and you invest $50,000 into it. So, for simplicity, after 4 years, you sell your house for $100,000. That's all yours for the downpayment on the next house, and with that kind of down payment, they don't care what you make because you can get a no doc loan, or, if you want a regular mortgage, you can still get aditional financng based on that piddly $25,000 income
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Re:Paying taxes vs. not paying taxes
Lilith's and Emily's theories will work out profitably - PROVIDING that real estate values in the particular area do not decline, PROVIDING that going rental prices in the particular area do not decline, and PROVIDING that the registration of new property deeds in your name do not draw an IRS audit.
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Re:Paying taxes vs. not paying taxes
And providing you will find a CPA to sign a return. These days, banks are hesitant to accept returns without a paid preparer's signature, especially for self-employeds. Sure, you can go for a stated-income loan, you're just generally not going to get terms that are anywhere near as favorable.
Also, I'm guessing that if your income goes down (say you break your leg and can't dance for 6 months) and then the mortgage company goes to foreclose and finds you were fraudulent on your initial application, there could be severe (possibly criminal) consequences.
Bottom line is, once again its advocating cheating the system. And you're the one who has to sleep with that at night.