As I mentioned I’ve decided to stop paying my self-employment tax. I just got my first letter from the IRS indicating that they noticed.
When I filed my 1040, I indicated that I believed that I was supposed to pay $3,271 in self-employment tax last year. I paid $2501.01 of that, and then decided to stop. $769.99 was still due.
The IRS has charged an additional penalty of $7.70 and interest of $6.52. The penalty was dated , based on a ½% monthly charge. The interest runs from at 7% yearly.
I’m getting 4.15% on my savings account, so to figure out what I’m really being penalized here you have to subtract what I’m earning on the money I’m not paying them from the penalty they’re imposing. Naïvely (that is, not adjusting for compounding), then, the real penalty per day is:
amount I owe × (daily penalty percent + daily interest percent − daily interest I get on the same amount in my savings account)
amount I owe × (0.0164% + 0.0191% − 0.0114%) = amount I owe × 0.0241%
Or, in short, the IRS intends to penalize me something on the order of two-and-a-half cents per hundred dollars I owe, per day.
My unpaid self-employment tax will continue to balloon with each passing year. Come , I’ll probably owe another $3,500–$4,000 in self-employment tax, with another $150 in penalties on top of that. Assuming the penalty rate is roughly the same then as it is now, the penalties on this new amount will run something like $1.15 per day.
That strikes me as something approaching if not surpassing real money, and might be enough to dissuade me from this part of the project if it weren’t for two other considerations:
- They have to actually get their hands on the money.
- It’s gonna cost ’em.
The first of these considerations is at this point pretty much a hypothetical. I haven’t gone to any trouble to hide my assets, and I’m sure in this post-Patriot Act era, it won’t take much effort for the IRS to find my bank account.
Still, if they follow their standard operating procedure, it will cost ’em $0.45–$4.79 every time they send me one of their notices, and even more if they have to go to the trouble to seize the money. If they turn me over to one of the private debt collectors they’re considering, these bounty hunters will take about a quarter of what they collect for themselves.
So while this may not be a smart investment move for me personally, when it comes to my goal of keeping as much of my money as I can out of the hands of Uncle Sam, the numbers still may add up.