I think about income taxes a lot, because I have been self-employed for the majority of the last 10 years. (And I also just wrote a nice fat check to our friendly, efficient government.) That means of every paycheck that comes into my hands, I have to set aside a certain amount for taxes and not spend it on necessities like our mortgage, property taxes**, food, utility bills and childcare — or anything remotely fun. (Yes, I know this is obvious, but please bear with me.)
As a self-employed person, the amount I have to set aside each month is 25% after accounting for deductions and exemptions, because of self-employment tax. This is a lot harder to swallow when you have to write those checks yourself, rather than have your employer just take them out for you. (I know, because I also receive checks from an employer, and it is nice.) So, really, I have to tell myself that each paycheck is really just 75% of what I bill for. A quarter of my labor is owned by the government. (This is true for everyone; but, again, it is just a lot easier when your employer takes it out for you. Out of sight, out of mind. Kinda like how they say it is harder to spend cash than use a credit card. It is more tangible, and, therefore, feels more real.)
So, if 100% of my work is really only worth 75% of my work, how much do I have to work in order to actually make 100%? Sounds like some easy math, right?
Let’s talk about the billable hour. As any billing lawyer will tell you: You cannot bill for 100% of your time. If you do, I venture to say you are being dishonest. You cannot be 100% efficient with all your time. It is impossible, unless you are a robot. You have to eat. You have to take breaks. Your co-workers come into your office and talk your ear off. You have meetings. I would say, on a good day, you are working at least 10 hours to bill 8, which is a 25% extra effort, just to meet an 8 hour day minimum. (The bare minimum requirement of most firms.) Also, many clients (insurance companies) use third-party vendors to cut 10% of a lawyer’s bill (another rant for another time). So now, to make 100% of your goal, you need to bill even more. You have to bill 10% more than the 125% you were already working. 125 x 1.1 = 137.5%. So, I have to work 37.5% harder than someone who can go into the office and work for 8 hours straight and go home.
Okay, now the government comes along and takes 25% of that. So, if you want to actually pocket your full 8 hours of billing, you have to work 25% harder than the 37.5% harder than you were already working. 137.5 x 1.25 = 171.985%. Just to earn 8 hours of labor. Therefore your average billing attorney, if they actually want to pocket all their labor and hard earned income, has to work 72 (rounding) percent more than an 8 hour work day. Now you know why attorneys work as long of hours as they do: 40 x 1.72 = 68.8 hours, minimum. And now you know why I have two jobs.
Someone reading this is going to be like: “Yea, but you bill like $350 to $500 an hour. So stop your sob story.”
Not, my friends, if you are a solo practitioner barely hanging on by the skin of your teeth. As one Facebook commentator I read recently noted (and I paraphrase): “The difference between what a Big Firm lawyer earns, and Small Firm lawyer earns is STAGGERING.” (Her caps, not mine.) Yep. Staggering, peeps. Like, there are days I wish was a teacher, because then I’d at least get my summers off and not have to pay for summer childcare. (I do not, by the way, charge nor earn $500/hour, or even $350/hour, just for the record.)
The big firms have all the big corporate clients that can afford the impressive fees. If your client cannot afford to pay $500/hour, you are not charging $500/hour. And if you do plaintiff’s work, you are not bringing in any money at all on a monthly basis. Also, if you don’t have the work, even if you are charging $500/hour, if you only bill a couple hours for that client all month, you are not faring too well. If you are a good lawyer, you might even suffer more: Getting a client’s case dismissed means no more work for you. And if you are honest, you are not over-billing, or over-working a file for no reason.
The realities of self-employment are true for any job or profession: You have to put in a lot of (free) time and labor just to get the work and keep the income coming in, as well as (free) administrative time and labor. When I was full-time self-employed, I often explained to people that I was having a good day, if I billed 6 hours. At least two hours of my day were administrative work. My husband had a short stint as a self-employed contractor, and he was putting in 60 hour weeks, minimum, to stay afloat.
Being self-employed is not for the faint of heart. You don’t have a regular income stream. You don’t get benefits without paying for them yourself. You don’t get overtime pay. You don’t get sick days. You don’t get paid vacation time. A day off of work is a day without making any money for oneself. The list goes on.
What is my point? The point is: Why are we taxing hard-working, honest people who work their butts off to put food on the table and keep a roof over their family’s head? Why am I paying the government for all my hard labor? Seriously? What is up with that? Why are we being taxed on our productivity? Every time I write a check to the government, it honestly feels like robbery. I personally think people should just be taxed on passive income. Or, at least, only after $50,000. Everyone needs at least $50,000 just to live in this country. Or to live in Illinois, anyway.***
But here’s where I really feel the punch in the gut due to income taxes and what causes me to gripe and complain the most:
- I get taxed above The Hub’s salary. So, rather than get to pay graduated income tax on my salary, I’m hit from the get-go at 25% on every single dollar I earn. On every single minute of my time. (Some call this the “marriage penalty.”)
- Then there is childcare. Given our reasonably good income tax bracket (believe me, I am very grateful for what we have; I do not take it for granted), we don’t get much of a deduction on childcare. And because we live in an affluent area, childcare is even more expensive than in most states. (Everything is more expensive.) When both girls were still in daycare, I paid over $2000/month for daycare. Since starting school, camp is, at a minimum, $6000/summer. (And I have spent more in the past, in order to get the “best of the best” care for my food allergic child who couldn’t swim when she first started camp.) All told, between after care programs, etc. I have to budget at least $12,000/year in child care expenses. And on average, I get about a 10% deduction on those expenses. In other words: A drop in the bucket.
- I cannot work, if I have to take care of my kids. Why can’t I deduct the full amount of childcare (used for working) as a business expense? Have you ever tried to write a complex brief with kids interrupting you every five minutes? Employers can deduct for childcare provided to employees. Why can’t I just deduct for the childcare I pay for to run my business!?
One last issue about taxes and the tax code:
As a litigator, I have to dress a certain way for court. Also, I have to walk a lot on horrible sidewalks to get to court. In my 20s, I was frivolous enough and vain enough that I could afford to replace my stilettos every three months. Now, not so much. (Remember my childcare expenses? There goes my shoe budget. And my clothing budget. And all the vacations I took in my 20s.) So, I try to find specific shoes just for work that can withstand grates and gaps in sidewalks and not hurt my feet, but still look dressy enough for work. But not too frumpy. (Okay, they are super frumpy.)
But the tax code says that my pantsuits are not tax deductible, because I can wear my work attire to weddings. (Yea, right.) And I supposedly can wear my frumpy work shoes to other events, as well. (Only if I want the “worst dressed” award.) I call balderdash on all of this. Have you ever shown up to a wedding in a pantsuit and frumpy chunky heels? In this respect, I think the tax code is sexist. I don’t love throwing the word “sexist” around liberally. But, in this case, I think it applies. Men can wear suits to court and weddings. Women can, but they don’t, because we don’t want to be cited by the fashion police. We still want to look nice, even if we have lost all our sex-appeal after baby number two.
In this respect, the tax code has a “disparate impact” (i.e., a disparate discriminatory impact) on women by making assumptions about professional work attire based on men’s, rather than women’s fashion. I should be allowed to deduct for attire I deem only explicitly suitable as work attire — i.e., courtroom attire. A woman should not wear a “little black dress” to stand before a judge or jury. (You also should not wear a black Lycra bodysuit. I’m talkin’ to you, lady I once saw at the Daley Center!) And a woman “should not” wear a frumpy pantsuit to a wedding. IMHO.
**Illinois has the second highest property taxes in the nation. And our county has the most expensive property taxes in the State. So, I am not exaggerating when I tell you we pay some of the highest property taxes in the country.
***I’m sure $50,000 goes a lot further in other parts of the country than here. So, wouldn’t it make sense to have some sort of graduated tax code structured around cost-of-living?
Econ-mom (EM): Three things – first of all, HEAR, HEAR for more childcare deductions! The amount of money we have spent on childcare over the past six years is OBSCENE. I’m sure when we had two kids in full-time care we would have been eligible for the earned income tax credit if we had been able to deduct that entire expense.
Second, I have long been jealous of men’s fashion. Need to dress up for work or a wedding? Wear a suit. Business casual? Khakis and a button down shirt. As my kids would say, easy peasy. I recently saw a man on Twitter complaining about needing to pack a jacket for business trips since he didn’t know how formal various events would be. I almost popped a blood vessel. I mean… gosh. That must be SO HARD not knowing what to wear at an event!! I have NO SYMPATHY for this. And bringing a whole jacket? Please. Try extra shoes, skirt vs. pants, etc etc.
Finally, as an economist I of course have some opinions on taxes, but I will save most of it for another post and just say that I’m generally fine with everything Law-mom (LM) is saying here. Economists consider income taxes to be distortionary (i.e. in theory they discourage people from working more) so there would be a lot of better ways to raise revenue while still lowering income taxes for many people in the middle class.
LM: Hey, EM, it could always be worse. I think we need an entire post some time dedicated to women’s fashion woes. What do you think?