Should You Do Your Own Taxes? (and Why I Don’t)

mustachian_eagleI’ve always been a do-it-yourself guy, and will remain so as long as I’m alive. The reason is not money savings but the fundamental recipe for human happiness: you must remain challenged and keep learning throughout your lifetime. People who miss this recipe end up chasing ever more desperately after passive entertainments and pleasures. But they never find the happiness, because it was in the other direction.

So of course, I’ve always done my own taxes. Starting at age fifteen, I remember filling out my cute little T-1 tax form back in Canada – working through the single piece of newsprint with a pencil and eraser and a hand calculator. Throughout those teenage years, I enjoyed taking deductions for education and moving expenses and rent and relishing every dollar that I got to keep.

Later I got a fancy adult job and had to deal with higher income, deductions for the retirement account, and capital gains and losses from my early attempts at stock investing. I moved to another country and had to allocate that year’s income between the two different tax systems, and nip the little attempts each country made to grab extra taxes from the accounts of the other one. I bought a house in the US and marveled at the tax deductible nature of mortgage interest and property taxes. Started a business and noticed the huge, complex range of tax options that suddenly opened up. Quit the day job and noticed how taxes suddenly cease to matter, because the US government becomes very forgiving to you if you’re bringing in under $50,000 per year, even if you’re actually a millionaire.

At this point in the story, we hit 2011 – the year that low-key Pete the retired Engineer/Carpenter/Dad started to type some shit into the computer, unwittingly transforming himself into Mr. Money Mustache, Notable Finance and Lifestyle Guru. Things were looking up as our boy was getting older, expensive early business mistakes had been resolved, and both Mr. and Mrs. MM started to make more money in our post-retirement hobbies. Suddenly, we had taxable income again.

I kept doing my own taxes as if it were 2010, but the increasingly favorable life conditions meant my tax bill was growing exponentially. This didn’t concern me too much, because it also meant my after-tax income (which was 100% unnecessary anyway – our living expenses are already more than covered by investments) was growing at a similar pace. You have way more money than you could possibly spend, and you’re paying a lot of tax. Only an angry ideologue would consider this a bad situation. I decided not to be one of those guys, and instead keep the energy focused only within my circle of control.

However, things kept getting better every year, and several Mustachians (many of whom are accountants) started needling me to improve upon my inefficient tax situation. I knew it could be done, but I was already very happy with life and making full use of my waking hours with a huge backlog of interesting things to learn and do. Did I really want to shut down some of these things in order to reorganize my taxes, in order to add even more unnecessary money to my accounts? I made a mental note to improve the situation, but only if the right opportunity ever came up.

Enter Tax Man

Keith passionately hijacks a session on taxes at Camp Mustache, Seattle, May 2015

Keith passionately hijacks a session on taxes at Camp Mustache, Seattle, May 2015

Eventually that opportunity arrived. At a weekend gathering of Mustachians, I met an accountant that was genuinely passionate about the field, in the same way I am passionate about building stuff. Keith Schroeder likes optimizing taxes so much that he does it even when he doesn’t need the money. He runs the same Wisconsin accounting firm he’s had forever, biking down the country roads to his office and dispensing Mustachian life lessons to his employees whenever the chance arises. To me, this is a trust-inspiring place from which to start a business relationship, because you are less likely to get into a fight over who gets which dollar bills*.

So I handed over my financial laundry pile to Keith to see what he would come up with. The results were highly worthwhile, and here are just a few of them:

Changing my LLC from a Partnership to an S-Corporation

When you start a small business, you bring in some money from your customers,  you spend a (hopefully) small amount of it on computers, restaurants, airplanes and taxis, your mobile phone and internet service, and so on. What’s left over is the profit, which normally flows straight down to your personal income tax return. Because you’re self employed, you have to pay a full 15.3% for Social Security and Medicare fees right off the top of this income, then go on to pay federal and state taxes on that same income. A pretty big bite. Unless you do this:

Figure 1: Saving $6 grand by switching to an S-corp

Figure 1: Saving $6 grand by switching to an S-corp. (Note: I assumed a 25% combined federal/state tax rate throughout this article just to keep things simple).

When you reorganize to an S-corporation, your company makes the profit and you are just an employee (and owner) of the company. The company can pay you a “reasonable” salary, and then hand you the rest of the income as a “dividend”, which is exempt from this 15.3% tax.

The bottom line is that re-organizing to an S-Corp can save your company about $6,000 for each $100,000 of gross profit.

When Income Inequality is a Good Thing

Mrs. MM and I are joint owners of our LLC. Until recently, were simply splitting the income from this entity equally. This meant that if we made enough money, we would both be required to pay Social Security up to the limit ($118,500 of income per person). However, our activities for the company brought in drastically different amounts of money. Since my side includes this blog which is over 75% of the company’s income, it was justifiable to make my “salary” higher so that some of it fell into the “Over $118k” portion that escapes above the limit of Social Security contributions. Her salary is lower but fully taxable. Here’s an example of how this works with a hypothetical 2-person company making $200,000:


Figure 2: Different pay split saves $7626 per year

These are just two examples of tricks that the accountant brought in, and there are many more including having the business lease an office within your house, making the most of the powerful SEP IRA options open to business owners (you can contribute up to $53,000 per person per year!) and more. Keith even founded a Wisconsin branch of my LLC to allow the blog to at last become an Amazon affiliate. The savings or income from any one of these tweaks should be more than enough to cover his accounting fees for the year, which is exactly how hiring an accountant is supposed to work.

The Downsides of Complexity and Cost

The improvements above are saving me some serious money, but they come at the cost of some added complexity. When you change your simple business to an S-corp with employees, suddenly you have to “do payroll”, meaning you write a monthly set of checks to each employee and to the state and federal government. There’s also the nonsense of “unemployment insurance” and even “worker’s compensation insurance”. My accountant thankfully helped me opt out of the second thing (why would I expect to get paid if I injure myself while working for myself?), but the first is mandatory (so I can continue to get paid if I lose my job working for myself!)

My new accountant is handling all of the paperwork, but there are still emails and phone calls to answer occasionally, forms to sign, and obviously the cost of paying his firm to do all this work – roughly $2000 in the first year including the reorganization work, $1200 in ongoing years.  A good investment given my current situation, but maybe not in 2010 when income was lower and business was simpler.

So, should you do your own taxes or not?

The average person has a single job, lives in a single house or apartment, and does not own a side business. In this situation, taxes are extremely simple and it is hard to get it wrong – especially if you use automated tax software like TurboTax, TaxAct, or Keith’s preference 1040.com. Canadians might check out SimpleTax or StudioTax. If you are mathematically inclined and enjoy the process, I think filing your own tax return is a beneficial and empowering do-it-yourself activity.

The average Mustachian is more likely to have rental properties or side businesses, and at this level the decision is more of a toss-up: doing your own work brings great benefits, and you can do the job to perfection if you make a point of it. But if you’re not at least somewhat passionate about the work, it is easy to miss some details and cost yourself some money.  I feel there’s no shame in hiring out your taxes in this case, since you’re building a new business relationship and the service will effectively cost you less than zero.

People like me are even better candidates for tax outsourcing: despite my earlier interest in DIY tax hacking and a love of spreadsheets and calculators, more recent complacency meant I was still missing out on a lot of the finer points. Doing my own business taxes instead of hiring an accountant was costing me over $10,000 per year and not giving me a proportional boost in life skills or satisfaction. As your income and business complexity rises, your tax abilities need to grow in parallel. If they don’t, outsource it and put the saved time and energy into going out for more walks instead.

Is Mr. Money Mustache Out to Lunch?

I’ve been hesitant to admit to you that I ended up outsourcing my taxes. Given the stories (and excuses) above, what do you think? Is tax accounting outsourcing practical? Or Wussypants, like the outsourcing of your gardening and lawn care work?

I’m enjoying working with this new helper in my life, and the higher net income is worthwhile as well. But I don’t want this reliance on another person to shut down my old tax brain entirely, leaving me reliant on professional help to make even the smallest decisions. But so far, so good: thanks to the last six months of working with this accounting firm, I’m feeling more tax-savvy than ever.  I wish you similar good fortune this tax season.



* note that the  same effects come up in couple relationships – things are much better if you’re not fighting over money.

When I first wrote this article, I mentioned that Keith Schroeder was willing to take on even more clients at his firm called Tax Prep and Accounting Services. After about 12,000 inquiries, he took on as many new clients as he could (over 200), and had to close the flood afterwards. Next year we will gather several willing accountants to share the work.

Since just running an accounting firm and doing tax work for hundreds of people is not enough, Keith also writes a blog called The Wealthy Accountant.

I receive no payment from any of the recommendations in this article, I just think they are useful. However I did provide Keith’s affiliate link for 1040.com tax software since it costs us nothing and will benefit his firm.

  • Isaac N February 10, 2016, 12:23 pm

    This is great — I’ve worked for myself as a web developer for almost 8 years. I’m currently just a sole proprietor with a DBA — not even an LLC. Another developer friend of mine keeps bugging me to set up some kind of business structure, but I’ve never really seen the point — I don’t feel like I’m bringing in enough to justify the hassle. Another commenter mentioned $50,000 as a break-even point where it starts to make sense. Is that relatively accurate? Last year I grossed about $67,000, work from home, and live in MN. I ended up netting closer to $58,000 before taxes.

    I guess what I’m really asking is: Does it make sense to do a corp of some sort? My understanding is I wouldn’t be able to take my home office deduction or deduct a percentage of my utilities, and it seems like a lot of hassle if it’s not going to end up making much of a difference at the end of the tax year.

    • Keith Schroeder February 12, 2016, 7:34 pm

      Rent part of your home to the LLC and take the deductions that way. It actually saves more.

  • Chris February 10, 2016, 12:31 pm

    I just did my taxes for the first time since 2007 and will try to continue to do my own. Besides never finding a decent CPA (moved states every 1-2 years, each new CPA disagreed with the last one’s job, etc.), I never understood my financial situation as well as I believe I do now because I never had to sort it out until this year. Even using TurboTAX, it took me about 20-30 hours total to sort everything out. Multiple earned income in multiple states, multiple stock grants, backdoor IRAs, and taxable accounts, multiple LLCs with both new and older rental properties, etc. It has just gotten crazier every year and paying over 2 grand for a CPA last year just really pissed me off especially since I found several mistakes the guy made while doing them this year. Finally, I really enjoyed the process as I know how to better my tax situation in future years now.

    I’ll go a bit contrarian here and say that, yes, it is wimping out to outsource your taxes completely. I think it would reasonable to do them yourself and check with a CPA before submitting and I may do that in future years, but I want to understand my situation like only doing my own (ok, with TurboTAX or similar) can do.

    BTW, I made that RE in an LLC taxed as an S corp mistake in previous years and yeah that was a big mistake! I undid it eventually.

  • Isaac N February 10, 2016, 12:59 pm

    This is great — I’ve worked for myself as a web developer for almost 8 years. I’m currently just a sole proprietor with a DBA — not even an LLC. Another developer friend of mine keeps bugging me to set up some kind of business structure, but I’ve never really seen the point — I don’t feel like I’m bringing in enough to justify the hassle. Another commenter mentioned $50,000 as a break-even point where it starts to make sense. Is that relatively accurate? Last year I grossed about $67,000, work from home, and live in MN. I ended up netting closer to $58,000 before taxes.

    I guess what I’m really asking is: Does it make sense to do a corp of some sort? My understanding is I wouldn’t be able to take my home office deduction or deduct a percentage of my utilities, and it seems like a lot of hassle if it’s not going to end up making much of a difference at the end of the tax year.

    And how do I get started?

  • yyz guy February 10, 2016, 12:59 pm

    My wife and I have 17 months until FI. I actually enjoy doing my taxes (Thanks to not having any mortgage interest we take the standard deduction these days).

    So, I was thinking about becoming an “enrolled agent” to help others to their taxes after we “retire” (ages 50 and 52)

    Anyone know if that is more difficult than it sounds? Does it require year round work, or is it mostly seasonal (ie, tax time)

  • yyz guy February 10, 2016, 1:05 pm

    Curious how you came up with the $60K salary, $40K dividend rather than zero salary and $100K dividend to save even more on SS/medicare?

    • Bill February 10, 2016, 5:20 pm

      The rules require you to pay yourself a reasonable salary out of the S-corp for the very reason that the IRS doesn’t want you to short your SS account. Reasonable is left to your discretion, but you can get audited if it is too low.

    • Keith Schroeder February 10, 2016, 8:12 pm

      60% is the IRS safe harbor for wages to an owner.

      • yyz guy February 11, 2016, 9:32 am

        Good to know, thank you.

      • gizmonte February 11, 2016, 9:59 pm

        What if the business turns a healthy profit and 60% of business income (as salary) equates to a value that far exceeds the fair market value for said employee services?

        e.g. 60% of 400K biz income = 240K per year but fair market value for an employee performing equivalent services/work in that local market is 50K (12.5%).

        • Keith Schroeder February 12, 2016, 7:36 pm

          60% is safe harbor, not the only answer. A reasonable wage could be lower, even significantly lower, depending on the facts and circumstances.

        • Larry Putnam February 16, 2016, 4:11 pm

          Didn’t know about the 60% safe harbor. I’ve had S corp in the past with significant income as healthcare consultant. Used business consultant salary comparisons to set employee salary for the S corp, always much lower than my net consulting income and lower than 60% “safe harbor”. But never any squeals from the IRS. Bit of a hassle to keep the required payroll records but but well worth doing with a $10K+ annual cost saving every year. Also, good vehicle for large retirement savings. S Corp great tax-saving strategy. You rarely read about it in finance blogs or articles.

  • Vawt February 10, 2016, 1:06 pm

    I have to admit I was surprised to see this post and at first thought this was contradictory to the DIY attitude that MMM emphasizes. Part of me still thinks using a handyman, roofer, plumber, or accountant are not that much different as a specific knowledge base and skill set is needed for each.

    Given the complexity, I understand outsourcing your taxes. However, I reject the reasoning that it pays for itself as the rationale due to many, many other posts saying that doing it yourself saves so much. I think a more honest answer is you have decided to trade your time doing the taxes for some money (which is a central them to MMM). Again, I am fine with it, but I think the reasoning should be consistent.

    • Heath February 11, 2016, 5:53 pm

      Couldn’t agree more. I’ll piggy back off of your comment with my reply as it’s in line with your general statement…

      There’s a whole lot of weak justifications going on in these comments a-la…

      “Oh, it just MAKES SENSE to hire a professional to do things you don’t know how to do and which are complicated and important, because learning is hard and paying someone else saves me time to maintain my complicated and luxurious lifestyle!”

      Be careful of this kind of thinking because it’s a pretty slippery slope to doing NOTHING yourself, which as we know from the opening paragraph is the WRONG direction to walk.

      That being said, the choice to NOT do your own taxes comes down choosing your life’s luxuries (a definite component of Mustachianism). You COULD do your own taxes, but it would take away from other parts of your life (in the form of time) to do it properly. You could also avoid things which would make the time investment necessary: aka simplify. In this case, MMM could not have a side business w/ complicated tax implications, but that might not align with his values. The third choice is to outsource. Just be sure that when you DO take this choice, you realize your weakness and accept that you’re not being as badass as you could, and you’re saddling yourself with another luxury.

      Compare it to driving your car across the country to visit your family on vacation. Could you ride your bikes? Sure! But it would take a long time, which would detract seriously from your other endeavors. Could you simplify your requirements and just NOT visit your family? Sure! But that might break your heart and stagnate important relationships. Or choice 3: you willingly break the ‘muscle over motor’ rule (aka outsource the travel effort itself to your car & the climate) and consciously realize you’re choosing a more complicated lifestyle, with the inherent luxury anchor (ahem: bedpan & catheter) that comes with it.

      It comes down to a choice of: insource, simplify, or saddle yourself w/ another luxury.

      As long as you consciously make the choice, with full understanding of it’s impacts on your lifestyle and further dependence on luxury, it theoretically follows Mustachian principles. Just don’t overdo it! And try, whenever possible, to either DIY or simplify FIRST :-)

      ALSO, when you DO chose luxury (whatever form it may take), make sure you’re doing it AS EFFICIENTLY AS POSSIBLE, which might have been the point of this article.

      • Zac February 17, 2016, 9:38 am

        I was going to say the same thing, but you put this in better words than I would have been able to find. Thank you, Heath, I agree completely.

        • Heath February 17, 2016, 10:36 am

          Thanks! After days of no replies, I was beginning to think I’d typed the comment for my own benefit :-P

          Though to be honest, just ordering my thoughts and assembling the hierarchy of “1) insource, 2) simplify, 3) outsource efficiently” will be very useful for my future decisions, so “for my own benefit” was a pretty solid return :-)

    • Druid February 11, 2016, 10:48 pm

      It depends on how complex your life is. My father had a C Corp and he a bought a building in the C corps name. He ended up selling the bussiness seperate from the building. Later he found out that he had to pay capital gains tax on the million dollar dividend(building). A couple grand for a CPA consultation when he formed the business could of saved him 200k. Trust and estate planning is very complex as well and the potential reduction in tax liability is rediculous.

  • Eric February 10, 2016, 1:20 pm

    That first paragraph explains my reasoning for DIY better than I could explain it myself. I currently still do my taxes myself because they are still relatively simple, but if I were to turn my woodworking hobby into a business, I think I would consider hiring an accountant. Some things are just best left to the professionals and I believe with the combination of both money and time that your accountant is saving you it’s definitely worth it!

  • Kim DeVilbiss February 10, 2016, 1:22 pm

    I would counsel Mrs. MM to consider the consequences of that low salary from the S corp on her own SS benefits later in life, to her settlement in the event of a divorce, and to her salary potential should she ever need to get a job. (Sometimes accidents, deaths, divorces, etc happen) It may not be worth that couple thousand bucks to put that low, low value on her worth as an employee. (Especially if she has an advanced degree.) Have you run the numbers on SS benefits she will receive in retirement? Please take into account that women tend to outlive their spouses.

    • Keith Schroeder February 10, 2016, 8:15 pm

      I consider this issue every time. My advice included redundancies for life issues like death and divorce. Also, after 10 years of marriage you can piggyback an old spouses numbers for Soc Sec.

  • John Bumstead February 10, 2016, 1:28 pm

    I don’t know how accurate they are, but I’ve read articles which put “lack of professional tax preparer” on lists of audit red flags for corporations, so if that’s a real thing, then having a CPA do your taxes may reduce the risk of an audit.

    And even if there is no truth to that, when you do get audited it’s definitely a benefit to already have a CPA onhand who understands your business and can immediately go to bat for you. Because certainly no one should tackle an audit without assistance, and if you’ve been doing your own taxes you’ll have to scramble to find someone and get them up to speed really quickly.

    • Keith Schroeder February 10, 2016, 8:17 pm

      It depends on the accounting firm. My clients get audited at an 80% lower rater than the local average. However, some firms face higher audit rates. I handle audits from other firms, BTW; I want to see how it all works. As an FYI, a local IRS auditor used to be my employee. If you have an S Corp and get audited in my neck of the woods, sorry. I trained her.

  • Chuck February 10, 2016, 1:30 pm

    I’m retired, so no W-2, and not self-employed, so no LLC nor S-Corp, but … I do have a range of investments which include muni bonds – some of which have a “premium” that amortizes – and MLPs – which generate a K-1.

    In a case like this, it is *hugely* advantageous to utilize a good tax pro, who knows how to properly report items like these. Oh: a well-recommended individual practitioner; not an H&R Block or some the like.

    As mentioned elsewhere, I also agree that it the tax pro’s job – one which I am VERY happy to out-source – to keep up with the constantly shifting tax code landscape. To me, a relatively small tax prep fee – which is a deductible expense – is waaaaay more than worth it to free up my time. And a really good tax pro can help to either reduce your tax burden or increase your refund.

    I used to do my own taxes – years ago before houses, marriage and more complex investments – with software packages. But if you have anything more than one W-2 and a straightforward 1099 you will probably be better off using a good tax prep pro.

  • Bill February 10, 2016, 1:39 pm

    I hope your accountant pointed out the downsides of both of those examples you gave, because you didn’t. If you take an S-corp draw (technical name for that thing where you take the profits instead of paying them to yourself and paying SE tax on them) and keep your salary below 118.5k or whatever the current wage base is, you hurt your future social security payout, particularly at a young age. Social security is complex, but to max out you need 30 years of hitting the wage base. Obviously the income inequality solution maxes one of you out but not the other. Again you are robbing your spouse of future earnings in social security. If you were to pass away, she would get some percentage of what you earned, but not all of it. Obviously you can stash that cash instead of give it to Uncle Sam to hang onto for you, but people should know these caveats anyway, particularly if they are not yet retired. Social Security can also serve as a kind of poor-man’s disability insurance if it is sufficiently funded.

  • Chris February 10, 2016, 1:48 pm

    I see no issue with you outsourcing your taxes and you shouldn’t be even slightly ashamed of it. You delegated a responsibility in which you have no expertise. The result saved you time and money. This is a huge win!! Rejoice!!! Brag!!! Pop open a beer!!!!

    My question is this… Do you feel a little guilty??? Not that I think you should. You’re just taking advantage of loopholes that are part of the system, but is that system fair??? You essentially shuffled some paper, changed the name of your money from “Income” to something else and avoided thousands of dollars in taxes that normal people with the same amount of annual income would have to pay. Not trying to guilt trip you. I would do the same thing. Just commenting on the injustices of our economy.

    • Greg January 8, 2017, 10:36 pm

      Bureaucracy relies on complexity to bamboozle and intimidate people into overpaying taxes. Why not turn the system on itself to not only highlight its pointlessness but to also profit from it? Simplicity and efficiency for their own sakes are core planks of Mustachianism, after all.

  • Isaac February 10, 2016, 1:56 pm

    Very timely post! I am kicking off my first big software consulting contract, via my LLC and have been weighing the benefits of SCorp election. The main benefit seems to be when your “reasonable wage” is substantially lower than the SS income max at $118k. But if your salary is over $118k, then you only save the difference in Medicare taxes of 2.9%.

    For example, as a software developer a reasonable salary might be $120k. If my contract brings in $200k as expected, I would save 2.9% of 80k = $2320, minus the extra tax filing fees (personal + SCorp) and paperwork hassle.

    How low can you push the “reasonable salary”? My last 3 years of W2 income have all been over $160k, so I don’t see how I could justify a salary substantially below that.

    Also, the two techniques presented seem to contradict each other. Pushing your salary over the $118k limit saves on SS taxes, but limits the usefulness of the SCorp filing. Am I understanding this correctly?

  • Dollar Flipper February 10, 2016, 2:06 pm

    Totally worth it for you. I used an accountant last year since I lived in one spot state, worked in state and then out of state, and then moved to the 2nd state. Also bought a house. In the end he saved me ~$300 and cost $200, so it was worth it.

    This year, I don’t think I’m going to use them this year mostly because he made me fill out all the same things I did on taxact on a PAPER FORM. Super frustrating but worth it for the audit protection that year. Not again though!

  • EDSMedS February 10, 2016, 2:33 pm

    1) If the retirement police finally put an end to your successful shenanigans, what is the required income necessary for this strategy to make financial sense?

    2) How will the added complications affect the day that you decide to “actually” retire? Is dissolving an S Corp more difficult than a partnership?

  • Mr. Thriftyskate February 10, 2016, 2:40 pm

    I’m constantly torn about doing taxes myself or paying for software. In the beginning, and for several years, I did them myself. It was a pain at first but I got used to it.

    For anyone starting out I highly recommend doing them yourself – or at least do all the calculations and pay a professional to double check. That was an invaluable experience and gave me a better appreciation for how my money was taxed and how to plan for the future.

    The past few years I’ve used TaxSlayer. My experience overall has been positive, but it feels a little clunky. If I didn’t know how the 1040 and other forms worked it would be much more difficult to navigate. I already know where all our numbers should input so I’m able to efficiently use the software.

    Given the amount of time it would take to complete the various forms by myself the price has been worth it. I have a limited amount of time at night and on the weekends. I would rather spend a little bit of money and gain a lot a bit of time with my family.

    I cringe at the idea of sitting alone late at night when everyone is in bed, or worse when they’re awake having fun, because I wanted to save a few bucks. If it were hundreds, yes. But I need to draw the line on saving money somewhere.

  • Norm February 10, 2016, 5:06 pm

    I’m highly in favor of people doing their own taxes. Of course, I went to school for accounting, and though I hate tax accounting, I’m probably more comfortable with it than most people, so take this with a grain of salt.

    If you start out doing your own taxes out of college, it’s very easy. Then as your career progresses and your savings increase, things tend to get more complicated, but you can learn each form, deduction, credit, whatever the first year that it shows up. Then you just repeat. The form your taxes take won’t change much year to year. I keep a little spreadsheet reminding me of the forms I have to do and how to do them. This year is our first with a rental property, so I am learning about the Schedule E and how to do depreciation. It’s fairly painless.

  • The Vigilante February 10, 2016, 6:28 pm

    As an attorney who prepares my own relatively simple taxes, I always fear only one thing: hubris. I look at my taxes, compare them to various tax-related work I do day-to-day in family law practice, and think “Yeah, I can handle this.” Then, just before I hit submit or seal the envelope, I always get a little voice in the back of my head questioning: “Did you really not miss anything? Maybe have another eye on this, someone without the preconceived notions you have about your own income and deductions…”

    Each year, I’ve double- and triple- and quadruple-checked myself, and I’ve sought little pieces of advice from family and more senior attorneys. And once or twice, I’ve found a minor error on the first double-check, but never worse. And yet that nagging voice persists. I imagine that as soon as my taxes become a bit more complex than the day-to-day tax-related matters that I deal with, I will succumb to the pressure, hire an accountant, and profit from it that first year.

    I don’t think it’s a wussypants decision if you know someone else can do it better without costing you life, time, and happiness. That’s what specialization is for!

    • Dollar Flipper February 11, 2016, 6:20 am

      What’s the worst that happens? You get audited and owe some money. There’s a really small probability that you missed anything, let alone anything very important.

  • Simon Kenton February 10, 2016, 7:10 pm

    I do the taxes for some young (mid-30s) friends. It is mostly an opportunity to catch up, and to give them some financial planning orders for the next year. For instance:

    — you need to start and max out an HSA, and max it for the next 35 years. Here’s why.
    — Kathy got laid off midyear. Let’s look at re-characterizing that IRA, or part of it.
    — you need to get with Patrick (the CEO) and sell him on a 1.9X company-wide 401(k) match. It’s a very good deal for the lesser-compensated, which brings a good deal to the high-compensated, and if fairness is not a big convincer you can sell him on the kind of personnel he can recruit with that kind of match.
    — you and X absolutely need to start a 529, and get with the grandparents about diverting the money for all that brightly colored plastic crap they want to buy for the Most Precious Grand-Child, and put it into college savings. Get the 16-year maturity deal.

    I make mental notes so as to be able to torment them about this at this time next year, which induces them to do it. We stop and do what-ifs along the way, to illustrate what i am asking them to do. Far as I can tell, taking one thing with another, I do a reasonable job – missed depletion at one first meeting, but got it at the second, so it was not (thank God!) an error and omission. Depletion! An oil and gas partnership had seeped into an ordinary salary, consulting, and rental-property economic life.

    Rant Mode – it is a damned outrage that US taxes need a high IQ, specialized training, and/or pricey software. They need to be doable by a person of perfectly average IQ and high-school math training. It is shameful that we have allowed this corrupt web to be woven around us. Even as a perfectly normal person is, and Should Be, trusted with the vote, a perfectly standard average person should be able to do taxes without an investment of weeks and hundreds or thousands of dollars. The commenter above who noticed the lobbying efforts of Intuit et al. to keep taxes vicious and opaque is perfectly right in his indignation. This tax system poisons a democracy. /Rant Mode


    • JB February 24, 2016, 3:21 pm

      Not everyone can do an HSA.

  • Kathy Abell February 10, 2016, 7:24 pm

    Way long time ago I used to do our taxes myself. Then one year my result showed we owed quite a bit more than what we had already paid via our tax withholdings. So we decided to use a tax preparer. The tax preparer determined we were getting a refund rather than owing more! Very much relieved, we made the decision to continue with that tax preparer. I still figure out what our taxes should be prior to going to the tax preparer, but it usually is the case that we get a larger refund or owe less when using the tax preparer. Even this year, when I triple checked my tax estimate using three different on-line tax calculators, the refund determined by the tax preparer was higher than my estimate! However, this year was the first time it took a 2.5 hour slog in the tax preparer’s office to complete our returns. :(

  • Bethany February 10, 2016, 8:32 pm

    We did this last year with our business, going from LLC to S-corp. It allowed us to collect a nice percentage of income as rental income and saved a lot in taxes because of the different structure, as well. Owning a business actually works quite well with Mustachianism. There’s no commute, and housing, transportation & phone are paid for with pre-tax dollars. Which is nice when you’re in a high tax bracket. And we get LOTS of credit card reward points!

  • Dividend Wisp February 10, 2016, 9:08 pm

    Personally, I have a small local accounting firm do mine, even though my taxes are very simple at the moment. With all investments being within a tax sheltered account. I simply send them my income info, any deductibles that I have, and they get it all done and do a good job of it as well for just $30 and I save all that time, and risks of making a silly mistake. Utilize experts when you don’t have the skill or inclination to do something yourself!

    And happy to hear you were able to save a lot of money with a MMM Corp. restructuring! :)

  • Adventures with Poopsie February 10, 2016, 10:01 pm

    I did my own taxes (in Australia) until I got an investment property. Then it just got too complicated. I have since sold that property, but haven’t gone back to doing my taxes because I find my end of financial year statement from Vanguard confusing. You’ve prompted me to ring them and get them to explain it to me, and then maybe go back to doing my own taxes!

  • Tracy February 10, 2016, 10:10 pm

    In Canada, the taxes are much higher.- so it is very advantageous to open up a corporation (small business taxations is around 14-17% depending on the province) . I personally use an accountant because 1) I don’t want to mess anything up, 2) save time and most importantly, 3) long term tax planning. It costs a pretty penny but worth it for tax planning.

    For example: it is great to have an accountant as a sounding board for long term planning for future investments (through the company), structuring it properly between dividends/bonuses/personal salary to minimize taxes against rental properties (that are in your personal name) and developing a long term view in structuring the company so that it becomes an investment powerhouse (ideally).

    My fav. thing about an incorporation is that it forces me to not touch the money except for investing because of tax implications.

  • Suvi February 11, 2016, 3:57 am

    For once I have to say Finland is great! I mean we pay heckloads of taxes -or at least that’s what everyone around here keeps saying- but at least it’s easy. I get a pre-filled form, and all I have to do is check everything’s correct, if not, report the missing things. I have yet to do that, it’s been 15 years and even my fund sales have been automatically inserted and so far so good! Ok, if I were an entrepreneur it’s slighly different, my dad’s allways extra antsy when it’s time to do tax reports… Why did I choose to tell this dunno, maybe just because we do pay a lot of taxes, got to find the silver lining :) Now I started thinking of it, I’m probably paying fot the automated tax reports with my taxes, hmmm…

  • Erin February 11, 2016, 7:16 am

    We have always done our own taxes using TaxAct: 1 vacation rental, 2 incomes (not our own business but we each have a home office). In 2014 we had our second child and bought our second rental property, so time/energy was less available and we decided to outsource. We we referred to an accounting firm (who seems to be pretty good with fair prices). It was still a lot of work to get everything perfectly organized, however they did point out one or two areas for savings with the rental properties. This year, I was planning on using those strategies to do a very thorough job myself. I want to make sure that I understand each number on the return and have some interest in the subject.

    MMM and Keith,
    Do you think the strategy of outsourcing when things get more complicated for a year, and then DIY afterwards is a good strategy? I do use the software (it has been TaxAct but I will look into the recommendation as well) however I also look at the actual forms to be sure I understand how the numbers come together. Also, does tax code change dramatically year to year given you take the time to try and understand the logic? Is there a site you recommend going to to understand the changes in a given year?

    • Keith Schroeder February 12, 2016, 7:44 pm

      Erin, I have no problem with engaging my services when they have a complex situation and then doing their own. The tax code changes more some years, less others. I have a group of clients showing up every 3-5 years for a tune-up. I’m good with that. I’ll even review your past returns to check for any issues.

  • Paul February 11, 2016, 8:01 am

    I’ve been using TurboTax for the last 6 years. Although our tax returns are not complex, we itemize deductions, deduct some business expenses, and file in two states because of employment locations; so the returns are not “simple”. I find TurboTax very easy to use, accurate, and reasonably priced. However, if I was self-employed, had an LLC or S-Corp, or had significant rental income, I would likely hire a CPA.

  • ESI February 11, 2016, 8:24 am

    I couldn’t agree more. Same thing happened to me — when I was making $X, I did my taxes myself. When I started making $XXXXX, I needed help.

    And yes, there is a cost, but as you’ve pointed out, the savings far outweigh the cost. And there are tons and tons of ways accountants can save you money.

    If you look at it as an investment, the return is pretty amazing!

    Not to mention time. You could spend hundreds(?) of hours trying to get it right and still might not get there. An accountant can spend far less time and get you where you need to be while you enjoy being with your family. :)

    Well worth the cost IMO.

    • The Vigilante February 11, 2016, 8:30 am

      Right about the hundreds of hours! The key is that opportunity cost; the time you have to spend to learn the ins and outs of the volumes of tax laws and regulations to save yourself the kind of value an accountant can save requires pretty much full-time employment in a tax-related field – and even then, mistakes are made! For those of us in America using the 1040EZ form or otherwise filing with just simple W2 wages, bits of interest, and a few common deductions, taxes don’t require such a huge investment of time and energy. But as they grow to the complexity MMM described, professional tax prep is absolutely worth the cost, easily.

  • Helen February 11, 2016, 9:49 am

    Is outsourcing this work practical? Are you a wussypants? Yes and no. Clearly, you are torn about this because you are always trying to model for us MMM values of near total self reliance, kicking at the ridiculously wasteful over culture and challenging us to do better. This is good. And yet, here you are employing a professional to do something for you that you could do for yourself. However, given enough training and the right tool kit, you could probably also amputate your own leg or perform a DIY vasectomy – but that doesn’t mean its a good idea or will realise the best results. You have acted in accord with your own integrity about what is right for you and your family. You have shown yourself to be self compassionate here, so this is good. Perhaps the conflict is that, although you are wealthy financially, and rich in time and relationships; you are as hard on yourself as you are on us, spiritually speaking. It is right to care for each other and the planet, it is right there are people like you kicking our arses (this is British for asses) but perhaps there is some lesson here in gentleness. Perhaps we need more evolution, not revolution. Love you MMM. x

    • Greg January 8, 2017, 10:59 pm

      My take on this post is MMM is essentially advocating not having an unshakeable, fixed position on things. Shortcuts / outsourcing / being a wussypants — however we wish to describe it — can be either a gift or a curse depending on the situation, and it is up to each of us to determine which one it is for ourselves.

      Having an absolute belief one way or the other leads to laziness of thought as it basically allows you to automate the thinking process. Sure, it provides a sense of control and security… but this is the very tree MMM tries to shake with his posts.

  • BB6 February 11, 2016, 12:45 pm

    I don’t think you deserve a punch in the face for this one. I believe that when you reach a certain level of complexity, your time is better spent on whatever business your business is in. Or, as others have suggested, vacation. Like some of the other commenters, I’m an attorney, and I certainly respect the expertise of an accountant.

    At the other end of the spectrum, however, absolutely no one with a W-2 and the standard deduction should have to turn to a store-front tax preparation service for help. Those services have a special place reserved in hell, right next to payday lenders. Filling out the IRS forms involves reading, following directions and simple arithmetic. The preparers’ lobbyists have actually convinced Congress to make it illegal for the IRS to allow direct electronic filing or to produce self-calculating forms. That would constitute the government “competing with private business.” They’ve developed a multi-billion dollar industry by convincing people it’s just too hard. Anti-Mustachian in the extreme.

    • Mr. Money Mustache February 12, 2016, 12:05 pm

      Oh yeah, good point and I agree with the special place in hell.

      At the very least, the tax software most of us pay for today should be provided for free on IRS.gov – if they used government money to produce paper forms in previous decades, it is only logical to shift this money to producing web-based version of those forms today. I’d expect it to actually cost less than zero, because the government could employ fewer humans to shuffle physical pieces of paper with handwriting on them.

      • Lynn February 13, 2016, 6:46 am

        Please let your readers who are in the beginning of their mustache growing years know that anyone making less than $62,000 a year can file their taxes for free online at myfreetaxes.com

    • Keith Schroeder February 12, 2016, 7:49 pm

      I agree with you, BB6, and MMM. Returns that simple are the least desired in my office. Many times we send them to a competitor. The IRS does have a software you can use: mine. The company that writes my office software and the affiliate MMM provides from my office was the same company that wrote the original (way back when) e-file software for the IRS. Many people qualify for free-file, including 1040.com.

  • Brian February 11, 2016, 4:58 pm

    Anyone else getting an email bounceback from info@taxprepusa.net … Ah … I see. You need to use the contact form well-below the fold. Keith: Fix that email. Your leads are draining away! ;-)

  • The Vagabond February 11, 2016, 5:07 pm

    Called Keith up today, as your situation very closely paralleled our own (though I’ve been working as a Schedule C/Sol Proprietor, so I was leaving even more on the table!). I’m sold, though– this year with Keith’s help I’m going to pick up all that delicious savings I’ve been leaving on the table! Side note, he’s super giving of his time for a guy who is presumably being hammered by mustachians right now!

  • TheHappyPhilosopher February 11, 2016, 8:50 pm

    There are advantages to doing your own taxes, and the main one is gaining a better understanding of the tax code. I will have to disagree with people that say using tax software is not doing your own taxes. Sure, sitting down with the paper forms is probably more instructive, but you still learn quite a bit by using Turbotax or whatever. With the tax code as complex as it is I’m happy to let software guide me through and make sure I don’t miss anything. I know MUCH more about the tax code than the vast majority of people in spite of using a catheter and bed pan (turbotax)

    I think most people have pretty simple taxes and should do them, but if I were in MMM shoes I would choose to outsource as well. Lowering taxes legally is something we should all do, even if financially independent. When we pay taxes we have to real voice in how that money is allocated. If we lower our taxes we can spend the excess on things that align with our values. By outsourcing MMM has more money to put to use how HE believes it should be. In this country that is how we vote – how we choose to allocate our resources. More powerful than the ballot box IMHO.

  • RubeRad February 11, 2016, 9:05 pm

    I’ve got a simple enough situation that for about 8 years I’ve used the free excel workbook downloadable from excel1040.com. It does way more than I need, handling retirement income, farm/rental, etc. The formatting is cleverly set up so that the worksheets print out formatted like real tax forms.

  • Mike S February 12, 2016, 1:10 am

    Thanks for the post. As always, your honesty is appreciated.

    To me, the goal of this style is to reduce stress and increase happiness.

    Thinking that the goal is to do everything ourselves, or to be frugal for frugality’s sake really isn’t much different than people who think that amassing wealth is an end to itself.

    I think Frugality and Skill Development are a means to an end (increased happiness). They are not an end to themselves.

    I hope to someday have taxes that are as complicated as yours. Seems like a pretty good “problem”.

  • Pat February 12, 2016, 5:58 am

    Like Suvi has, it is nice to find a silver lining in the tax code. In Canada you file for the province of residence on December 31. So you moved 3 times/3 provinces last year? No problem. You live in one province and earn money in two others? No problem. Taxes were collected where you work, but they all sort out who owes who provincially and you just get your refund/pay your extra owing.

  • Edifi February 12, 2016, 6:29 am

    Given MMM’s stated altruistic mission, is there a type of B Corp that makes sense to apply? I know B corps pay tax like C corps; is there an analog for S Corps?

  • STBJ February 12, 2016, 7:32 am

    OK my wife is self employed, works out of our home, and has some type of arrangement with our accountant where we write off a ton of stuff against using the house as workspace. She also gets to buy two IRAs each year, one for herself as emploee and one for herself as the ‘business’. She has much lower SEP taxes than beofre we hired this accountant. The 5 K she puts away in the 2nd IRA otherwirse went to taxes in prior years. Is it likley the accountant set her up in an S Corp.
    Saving more money every year and more embarrassed each year with what I did not know 35 years ago. No RE for me but our picture is brighter.

  • Dejappe February 12, 2016, 8:29 am

    A bit more critical opinion here:
    I think it’s a very good idea to seek help from a professional to optimize your finances/taxes like above, especially if that means a huge profit like in this case.
    However, I do not really see why you’d keep it outsourced once all the reorganizing is done. What is exactly the difficult part once you have your company going and one (or two years) of example what to fill into your tax application.
    As long as the situation doesn’t change, you just copy what you did last year with different numbers. The day you stop earning money with the company cause you quit the website, or your wife suddenly gets a new hobby that generates much more income than you, you can contact him again to find a new optimal way.
    1200$ a year might not be much to you compared to what you’re getting out of extra profit now, but is it truly worth losing that money each year for something basic and more importantly the “tax knowledge” cause it’s out of your mind forever. Setting it all up is the hard part, maintaining it should be rather easy with an example.
    1200$ is already 120 times that 10$ at a time ;) And if your situation changes in 5 years, you just pay the 2400 again.
    My 2 cents :)

  • thinkmore February 12, 2016, 10:47 am

    Just go ahead and get the catheter and bed pan out…

  • Scott February 12, 2016, 1:47 pm

    Here is a potential compromise for MMM or folks in a similar situation. The money that MMM pays Keith in year 1 to implement some new tax avoidance strategies is well worthwhile and, as demonstrated above, pays for itself due the tax savings generated compared to previous tax periods. But now that the tax avoidance strategies are in place, if MMM’s business and financial activities are essentially the same for the next several years, he can reap the same benefits himself by simply repeating the tax filing strategies on his own in future periods. This will save him $1,200 per year until his business and financial activities change significantly.
    If you were to browse the client files of an accounting firm you would probably notice a common acronym: SALY. SALY stands for Same As Last Year. Tax preparers often document transactions or deductions with SALY . If a new staff member were to ask a more experienced tax preparer “what should we do with issue/transaction X for client Y?” The answer is often “…well, grab the file, what did we do last year?”. Clients with no new tax issues are cash cows for folks like Keith because the SALY returns can be prepared by the lowest level staff remembers and only require a final review from someone with more experience and expertise like Keith.
    So, hire a good CPA to prepare your return this year. Ask tons of questions and make sure you understand everything your CPA did and why he/she did it. If you don’t have any new business/financial/tax issues in subsequent years you can simply repeat the same tax strategies and forms with new numbers.
    This is not a foolproof plan as there are always some changes in the tax code from year to year but, it could be a nice compromise for people who want to save money, are willing to do their own taxes, but would like some assurance that they are on the right path. If you end up with major changes in your tax situation a few years down the road you can always go back to a CPA.

  • Pierre February 12, 2016, 4:17 pm

    Great article but I wanted to react on this:

    > There’s also the nonsense of “unemployment insurance” and even “worker’s compensation insurance”. My accountant thankfully helped me opt out of the second thing (why would I expect to get paid if I injure myself while working for myself?), but the first is mandatory (so I can continue to get paid if I lose my job working for myself!)

    Employment Insurance works because everyone pays it. It’s the way taxes work. Everyone pays but a few get direct payouts. Even private health insurance works like that. I understand the absurdity you’re trying to point out but I don’t think it’s fair shooting at EI just because you’ll never get a payout.

    Even if you don’t get a direct monetary compensation out of it, it still benefits society by helping out people who lose their jobs.

  • Anders February 12, 2016, 7:47 pm

    Perfect timing for this post, MMM. I were planning to do some changes in our setup this year so you got my mental wheels spinning.

    We have a similar situation; husband and wife LLC taxed as s-corp. The company provide us with health insurance and pay our HSA’s in full as well as 25% of W-2 income towards our SEP’s. The rest of the profit goes towards dividends.

    Considering to contribute to solo 401k’s instead of the SEP’s that we had for a few years. With the solo 401k the company still can pitch in 25% of W-2 but the account owner (us) can contribute 100% of the income or max $24k to the account. That would mean lower income tax and we would be able to live off the dividends.

    Any opinion on shifting over to solo 401k’s, Keith Schroeder?

  • Kurt February 14, 2016, 8:44 am

    MMM – to answer your question about whether or not outsourcing your taxes makes you a wussypants, I would humbly offer a “yes and no.”

    First the case for “Yes.” Let’s be honest — learning how to do your own taxes is no harder than learning how to build a house from scratch: both are pretty darned hard, but if you have the passion to do one or the other, you read, watch you-tube videos, make friends with experts and ask their advice, and basically devote yourself to getting good at it. So if you wanted to, you could do your own taxes and get the same results as your accountant, I’m guessing.

    Now the “No” case. Just because it is possible to do something yourself, that doesn’t mean you are not being a good and proper Mustachian if you choose not to do it. The true purpose of following the path of the Mustache as I see it is to be happy. This means developing and following your passions. It also means being efficient. These two things come together when we explore the things we have a natural knack for doing, and realize with some practice we can be as good or better than the “experts” we used to hire the work out to. We throw ourselves into learning how to do them, we derive a great deal of satisfaction (and fun) in the process, and we save a bunch of money. Then we look at the work that the so-called “professionals” did for us in the past and realize that in many cases it was — at best — really simple, and at worst, not done as well as we would have done it ourselves.

    I have found this to be the case with simple plumbing, electrical and handyman work. I have also found it to be the case with my taxes (don’t get me started about the mistakes I uncovered when I finally started reviewing the work my CPA was doing on my returns years ago). But there are some things that I don’t have the love for (like doing major construction projects or replacing the wheel bearings on my minivan). And so I have decided to continue outsourcing those to the professionals. No shame in that, and no shame in doing the same for one’s taxes — both can hurt you if you do them wrong, and both are complicated enough to require true devotion if you choose the DIY route.

    Just because we CAN do something ourselves, doesn’t always mean we SHOULD. It comes down to what makes you happy. I love managing my own finances, and have always been able to get better returns by investing in individual stocks than just buying index funds (it’s much more tax-efficient to invest this way too). But if I didn’t love it, I would never have put in the many hours required to get good at it over the years, and I would be a fool to “dabble” in it.

    So I guess my philosophy is: don’t mindlessly outsource, but feel free to do so selectively when you believe that spending your time elsewhere will bring you more joy and financial independence. This is why I don’t feel bad when I read some of your badass articles about things that I don’t think I’ll every do myself, and why you shouldn’t feel bad about shying away from diving too deep into the personal finance/tax pool.

    Having said all of that, I will say that my ratio of DIY to outsource has shifted from 20/80 to 90/10 since I became a MMM reader, so thanks for all that you do to inspire us with every new posting!

  • Eric February 14, 2016, 6:57 pm

    Just a note, their website won’t let anyone from outside the USA login as a security measure. So if you’re working abroad, you won’t be able to use their software.

    • Mr. Money Mustache February 15, 2016, 11:56 am

      Try TunnelBear if you ever need to get around artificial country restrictions on websites.

  • Ryan Amato February 15, 2016, 7:35 am

    Very interesting read. I have a bigger picture / political driven question to follow up with.

    At what level of profit/income does it become immoral to take advantage of tax breaks for the “business” to the detriment of society?

    I don’t think most would have an issue with a family like MMM’s taking advantage of tax laws to put more money in their pockets, but a lot of people have an issue with large corporations using the same tax laws to their advantage to save millions / billions and put it into the pockets of the share holders.

    Where does one draw the line, if any? Or, is it every person for themselves as long as it is legal at the time?


    • The Vigilante February 15, 2016, 7:52 am

      Cliff’s Notes response:

      There is no level at which control of your own life and time (both of which are required to earn money, which is then taxed!) becomes immoral, unless you use your life and time to control someone else’s life and time. Such as when you use the threat of prison to extort money from those who properly earned it.

      “The detriment of society” does not and cannot follow from the exercise of individual rights within that society. Society is, after all, just a large collection of individuals, and the more we trample individual rights, the more you stifle this odd, imaginary beast called “society,” because you are stifling the individuals of which it is comprised.

      I’m not arguing that we should eliminate taxes – just trying to let you see that there is more cause to be concerned with the expansion of that power than there is to be concerned with the exercise of whatever limited power the taxed individuals have to minimize the impact of tax payments on their lives.

      Also consider that those families like MMM’s that you hold in high esteem would be impossible without the consistent gains that those corporations make in part by taking advantage of those “same tax laws.” Those corporations are the same that MMM has invested in. Now, are tax breaks solely responsible for the incredible gains that businesses have seen in the last 200 years? No, far from it. But we can’t pretend that taxes are all for the best, or that corporations and profits are the root of all evil!

      • Ryan Amato February 15, 2016, 8:33 am

        Agreed, the answer is usually somewhere in the middle with both extremes working to balance each other out. Too much gov. regulation leads to a severe lack of freedom. Too much freedom can lead to corruption, extreme concentrations of influence.

        I see life as an endless struggle to achieve an impossible BALANCE.

      • Ryan Amato February 15, 2016, 8:44 am

        My next train of thought takes me to a place of, “Is the general public aware / educated enough to make good long-term decisions that are in their best interest?”

        Does every individual working for their best short-term interests inherently bring up the collective interests of all?

        Or is it a bell curve where it works great for a period of time before tapering off and declining due to reduction of resources, changing environment, etc?

    • TheHappyPhilosopher February 15, 2016, 8:22 am

      “At what level of profit/income does it become immoral to take advantage of tax breaks for the “business” to the detriment of society?”

      The answer to this question rally depends on your definition of morality. In my opinion there is really only individual morality with regards to tax law, and thus up to each individual or corporation to decide for themselves. When people have issue with one business following the law, and not another, they are really trying to force their morality and judgement. Following the law and paying the minimal amount of legal tax you can is only immoral if you decide it is…for you.

      • The Vigilante February 15, 2016, 8:29 am

        I apologize if this comes off as hostile, that is not my intent. But I wonder if TheHappyPhilosopher would be as supportive of subjective morality if he were faced with a gun to the head, held by a thug who doesn’t think killing is immoral as long as you look at him the wrong way. My guess is, suddenly, there would be black and white right and wrong to this philosopher.

        • Ryan Amato February 15, 2016, 8:40 am

          One could argue that the violent thug is violating the victim’s individual rights by threatening his life. This seems pretty clear, black/white to most people who would like to continue living.

          Something that is not as clear would be large banks approving huge home loans to people who they know cannot repay or not doing sufficient due diligence to check their reported incomes. In this case, it is not as directly dangerous to the borrower’s life, but on a large scale creates major issues.

        • TheHappyPhilosopher February 15, 2016, 8:58 am

          Please reread my comment as I didn’t say anything about morality with regards to threat of violence, unless it is a metaphor (Thug and gun representing government and taxes) :

          “In my opinion there is really only individual morality with regards to tax law”

          But, to answer your question (and yes, it did come off as slightly hostile – but maybe I am projecting my own emotions onto your words ) I would argue still that there is no absolute morality with regards to thugs and guns or anything else. When does something become immoral? When 51% of society agrees? 80%? 99.9999%?

          Is homosexuality immoral? Does that change depending on whether or not society agrees or a law is passed? How about slavery? How about driving an SUV a half mile to school? capital punishment? Clear cutting a forest to build a house to shelter abused women? or maybe a new subdivision. Violently oppressing minority groups within a country simply because they simply want to govern themselves? What about all the ‘morality’ that various religions and governments and organizations impose upon us? What should we do when they conflict with and contradict each other?

          There is only individual morality, and I hope the combination of laws which deter violence against others, my awareness of my personal safety and the personal morality and code of conduct that others follow limit the chance that a thug with a gun will act with violence upon me.

          And also to clarify: I am not ‘supportive’ of subjective morality (or individual morality as I refer to it). I simply believe it is the only type of morality that exists. My observations on morality are simply to allow me to best understand how the world works. When I view the world through the lens of individual morality, the actions of others make sense and everything becomes much clearer.

          It is an interesting topic for sure, I will eventually write a few articles on it. Thanks for your comment, got the gears turning in my head until the coffee kicks in ;)

          • The Vigilante February 15, 2016, 9:01 am

            You’re welcome! While we’re very far off right now, I encourage you to continue with that train of thought, because I think it will lead you to eventually agreeing with me :)

  • Lauren Shaughnessy February 15, 2016, 11:35 am

    HI MMM,
    I’m confused as to the reasons why Kevin prefers 1040.com to Turbotax? I’ve entered my information into both programs and TurboTax provides a larger payout and has an easier interface in my opinion. Just curious if I’m missing something.


  • Jeremey February 15, 2016, 12:28 pm

    Uh who says an LLC taxed as an S corp needs to have employees? I issue only 1099s and K1s to avoid the hassle of dealing with FUTA, workers comp, payroll, and all related mess.

    • Mr. Money Mustache February 17, 2016, 6:22 am

      Thanks Jeremey… But does that method still allow you to report some of the income as dividends, thus skipping some of the self employment tax?

      • dandarc February 17, 2016, 9:10 am

        I think what he’s saying is that instead of paying himself or any other owner’s of the S-Corp a salary, everyone instead works as independent contractors. So he’d pay self-employment tax on the contractor 1099 income, and not on anything distributed as a dividend.

        I imagine so long as there is a reasonable amount paid out as active income that self-employment tax is owed on, this might be OK from an income-tax standpoint. You could definitely do this in such a way that the owner-contractor is paying the same tax as an owner-employee, at least in terms of federal income tax.

      • Scott February 17, 2016, 11:23 am

        Your use of the word “dividends” here and in the photo graphic in the article is not quite right. You are not actually receiving a dividend from your S Corp. Dividends are defined as a distribution of C Corp Earnings & Profits (E&P). You could potentially receive a dividend from your S Corp if (1) you previously operated your business as a C Corp prior to making the S election and (2) your business still had a balance of undistributed E&P from the years that it operated as a C Corp. However, this unique scenario does not apply to you since your originally operated as an LLC. Therefore, while you may received distributions from your S Corp, you will never receive a “dividend.”
        S Corp profits are allocated to it’s owners and flow-through to your individual tax return as if you earned the income yourself. S Corp profits are allocated to the owners regardless of whether the profits are retained in the business or distributed to the owners. This an important distinction from a true C Corp dividend.
        To clarify, your S Corp strategy is perfectly designed and implemented. It’s just that the use of the word “dividend” in the photo graphic above is technically incorrect and may be confusing to readers trying to understand the specifics of your tax planning.

        • Keith Schroeder February 17, 2016, 2:39 pm

          The technical term is a ‘constructive tax-free dividend’. All corps can have dividends. With an S Corp the distributions are dividends and the rest is pass though profits.

          One other note I never mentioned before: Distributions must be pro-rata to ownership. Disproportionate distributions collapse the S Corp.

          I know it is self-serving, but with the complications and tax savings involved it probably makes sense to have a tax pro handling the matter.

          • Scott February 17, 2016, 3:57 pm

            Hmm…never heard of a ‘constructive tax-free dividend’. I guess I need to learn more. Do you have a code section or other source that uses that language?

          • Scott February 17, 2016, 4:12 pm

            “…distributions are dividends and the rest is pass though profits”

            With all due respect, I do not think that statement is correct. Assuming no C Corp E&P, as is the case for MMM, S Corp distributions are a tax free return of capital to the extent of MMMs basis. Distributions in excess of basis are capital gain. Again, without C Corp E&P, there is no “dividend.”

    • Keith Schroeder February 17, 2016, 2:34 pm

      If you don’t pay any wages your corp return never closes for audit. When the IRS audits they re-classify all 1099s and K-1s for all years paid to owners as wages. The penalty is 100% on the trust fund portion and interest is applied. You need to fix those returns ASAP! The IRS works from one end of the country to the other sweeping all S Corps without any wages or very low wages to owners. A possible fix is to add the required wages to E2 on your personal return and pay the SE tax. You also need to stop what you are doing right now. You have a major financial disaster in the making. The Tax Court is littered with cases where businesses did what you are doing. The IRS has won every case to date. Please follow the method either MMM outlines here or an even more detailed account on my blog. IRS problems of this size can delay retirement for a very long time; the opposite of our goal here.

      • dandarc February 17, 2016, 4:21 pm

        I don’t think Jeremy’s saying that he’s underpaying self employment tax at all. Are you saying that if an S-Corp had $100K of “income” before any kind of taxes are applied, that paying a $60,000 salary and a $35410 constructive tax-free dividend (100K – 60K – 4590 employer side of FICA) would be OK, and paying a $64,970 as a contractor / reported on a 1099-MISC and properly paying SE tax on that and making a $35030 constructive tax-free dividend (100K – 64,970) would result in incredible penalties and interest?

        I ask because ultimately, the self employment and income taxes payed under those two scenarios are both exactly the same – $9,180 in SE tax either way, and $95,410 of income subject to income tax (after subtracting 1/2 of SE tax in 1099 scenario).

        Might still be begging for an audit and so a risky play, but you paid the correct amount of taxes on time.

  • Dan February 16, 2016, 10:01 am

    So I am a CPA but not a tax accountant. However, I watch and read about the tax code all the time. My suggestion to you is to set up a defined benefit pension plan as an additional way to deduct money for retirement. It’s a bit complex, but I think worth it to lower your tax burden. Many highly compensated entities, such as physician practices, dabble in this sort of thing.

    • Keith Schroeder February 17, 2016, 2:42 pm

      I agree, Dan. The older you are as an owner, the better the defined benefit plans work. You can really blast it out of the park when it works.

  • mathman February 18, 2016, 6:48 am

    Step 0: Have new tax situation that goes beyond my level of comfort this year.
    Step 1: Read MMM and get excited about Fishback Tax.
    Step 2: Recall that “if it’s too good to be true, it probably is”.
    Step 3: Fill out form on Fishback Tax website but maintain skepticism.
    Step 4: Wait about a week.
    Step 5: Receive reply stating that because I live in NYC, “we have determined that your tax situation…necessitates an increased level…of expertise beyond our…chosen capability”. Nice. Self-declared incompetence!
    Step 6: Back to step 0.


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