Declare the pennies on your eyes.
March 26, 2009 10:32 AM   Subscribe

My tax situation just keeps getting better! After coming to the conclusion that I'm getting nothing back for my W2s because I earned a tiny amount from a non-profit on a 1099-MISC, I've got a brand new headache.

I received something from the City of Los Angeles claiming that I owe the city some kind of business tax. According to a tax guy I spoke to, this is because I had to file a Schedule C along with the 1099s. I sent a reply to their vague inquiry back in mid February; but last night I get a notice that I failed to respond, and currently owe penalties on top of the approx. $1,000 per year they're charging me for my so-called business.

To put this into perspective, they're charging me $1,100 for 2007, a year when I made $1,900 from freelancing (which I have also already paid the state and federal taxes on). On top of that, they're charging interest and a penalty, in spite of the fact that this was the first year I've heard of this city tax, after years of obediently filing my stupid taxes.

They're saying I need to pay them $4,300 before April 10th, or file for a hearing.

What the hell is going on? What should I do?
posted by evil holiday magic to Work & Money (14 answers total) 1 user marked this as a favorite
Retain a lawyer. You're already in the middle of a legal proceeding, and it's imperative that you receive competent legal counsel.
posted by valkyryn at 10:46 AM on March 26, 2009

Seconding retaining a lawyer. Find all the documents you sent. I hope you made copies of the letter you sent.
posted by Ironmouth at 10:54 AM on March 26, 2009

IAAL, IANYL. You probably should retain either a lawyer or a competent tax professional.

You really need to take better control of your tax situation. Taxes might be stupid, but you are responsible for understanding the implications of your business and tax situation and paying income taxes and other fees due in accordance with law. You're not getting "nothing back for your W2s because [you] earned a tiny amount from a non-profit." There is no penalty for doing freelance work. You are paying the taxes on income from self-employment that everyone has to pay. Most freelancers understand this and set their rates accordingly.

You should closely read the letter from the City of Los Angeles and figure out what they are asserting to be the basis for the money you owe them. Are they asserting you owe them income tax, or permit fees, or something else? You need more detail than "some kind of business tax." Many locations require certain businesses to have permits and other registrations. You need to find out if the activity you engaged in (or plan to engage in) requires such permits. You need to figure out the cost of getting them and you need to find out how to minimize your past liability for them. You don't need to take what they say at face value - if they say "Yo, evil holiday magic, under Regulation FY-1234 you owe us $1,100!", go figure out what that Regulation says.

Everyone I know who does any freelancing either understands tax and permit issues well himself or herself or has an accountant who understands these issues, and it really sounds like you should, too. It sounds like your "tax guy" might be the right person for that. is he saying that you should file Schedule C to document the expenses of operating your business, which are deductible from your income from it? That sounds right - hopefully you have and can document such expenses to minimize your tax liability. However, your indignation at paying taxes is a little over the top - did you think that income from self-employment was totally tax free?
posted by iknowizbirfmark at 10:59 AM on March 26, 2009 [3 favorites]

Response by poster: iknowizbirfmark,

I've been filing Schedule Cs along with my 1099s all along. I don't have the document with me right now, but I believe it's something to do with permits. I know several people in similar fields, and though they've dealt with the same state and federal tax hits, none have gotten threatening letters from the city about permits.
posted by evil holiday magic at 11:08 AM on March 26, 2009

Ditto iknowizbirfmark. You get through this by taking the city/state/IRS seriously enough to actually read and comprehend their letters, forms and booklets. Complaining about a bill, when all you know is that it's got something to do with permits, is pointless.
posted by jon1270 at 11:23 AM on March 26, 2009

The City/County of Los Angeles started doing this a few years ago to everyone who filed a 1099 that lived in Los Angeles. You have to fill out the form that they sent you, and if you do not indeed run a business then you need to retain an attorney who is well-versed in local tax law or a competent tax professional to help you sort this out.

They sent me a form like this, but since all of my 1099 income was earned out of state, I didn't have to pay (it was a speaker honorarium). My accountant sorted it out for me, and I still had to fill out the form they sent.
posted by bedhead at 11:34 AM on March 26, 2009

It's not a "so-called business." It's a business. If you're filing as a freelancer, you are a sole proprietor.
posted by Airhen at 11:34 AM on March 26, 2009

Response by poster: Please don't make this thread ad hominem. You may not feel my tone is appropriate, but that's really beyond the scope of the question. Send me a PM if you only want to wag your finger at me.

I'm looking for answers to this particular situation as it stands currently, and nothing else.
posted by evil holiday magic at 11:36 AM on March 26, 2009

First, honestly, no one at all anywhere can help you until you can better describe LA's basis for saying that you owe them money. It's not about your tone - it's about the imprecise nature of "it's something to do with permits."

Second, honestly, nothing here so far is finger-wagging. I would save that for some fool really getting gobs of income and hiding it or otherwise acting illegally. My comment to you was meant to show you that, however you feel about taxes and government involvement in business, you will find out that relying on how you feel things should be will not help you in addressing your tax liability. If you want to, find out the rules and take an aggressive approach to avoiding tax liability. (Of course, you risk audit, etc., but that's another story.) The most aggressive people in this regard that I know (I would really call them tax cheats) might have the same beliefs about the tax system as you do, but they express them by structuring their actions and engaging in filings and activities to aggressively avoid tax liability, not by complaining about it.

You're in the situation you are in because you are just sticking your toe into freelancing and are surprised by the resultant obligations and taxes. That doesn't make you bad person, it just makes you a person who needs to educate himself or herself. I don't want to lecture, I want to inform on those topics where I can, because others help me in the same way. Some others have noted your casual attitude towards these issues, but that's not really ad hominem. Your current situation is relatively easy to address, but it's going to be far worse if you continue to take a casual approach to these types of issues.

We are trying to answer your question of "What the hell is going on? What should I do?" What the hell is going on is the government is trying to get some of your money, maybe more than they are entitled to, because you may not have taken the appropriate steps to understand and address your tax/business situation. What you should do is inform yourself and proactively address issues like this. Good luck and best wishes.
posted by iknowizbirfmark at 12:13 PM on March 26, 2009 [2 favorites]

Response by poster: iknowizbirfmark,

I will provide more details later.
posted by evil holiday magic at 12:33 PM on March 26, 2009

Best answer: Ok, perhaps this will help: Los Angeles Small Business Tax info. What this person states is that you have to file with the city for an exemption by February 28 of the year following the income (i.e., for 2008 income you would have had to apply for the exemption by Feb. 28, 2009) but that you can apply for a one-time penalty waiver. She also has a link to her post on how to talk to the L.A. Finance Office.

I still advise consulting with a tax professional, but this should at least set you on the right track. I am positive that she is talking about the same thing you are talking about because when I lived in Los Angeles I had the exact same thing happen, so even if you are not a creative professional (her target audience) this should still help.
posted by bedhead at 12:41 PM on March 26, 2009

Response by poster: bedhead,

I think you've found exactly the scenario I'm dealing with. I will try visiting the City Finance Office to request the penalty waiver, and I've got a consultation with a lawyer next week.
posted by evil holiday magic at 4:38 PM on March 26, 2009

Great! Glad I could help. Hope it turns out well for you. At the very least you can probably get your tax bill greatly reduced (as detailed in the second post linked).
posted by bedhead at 6:29 PM on March 26, 2009

Response by poster: Update:

I spoke to an attorney last week who echoed the advice to visit the City Finance Office in person, request a one-time penalty waiver, and pay back taxes on the spot. He confirmed that the amount levied against me was arbitrarily set based on the city's "estimation" of my earning $200,000 from 1099s over the past three years. He also commented that many of these letters go out after the deadline has already passed.

The office was packed with similarly bewildered people, dealing with similarly menacing letters from the city, so it took about two hours to get through it this morning; not counting the time it took to find parking, walk several blocks over, and find the public entrance.

The clerks were very nice, and I did my best to be, if not charming, at least amiable and organized, providing them the letter I received, and my printed tax documents, including those yet to be filed for last year. After the penalty waiver went through, I paid a total of about $176 for the past three years. The clerk repeatedly remarked on how backlogged they were, and agreed that few people know about this tax to the extent that she suggested I use ignorance as my reason for requesting the waiver. Only one fellow freelancer I know has ever dealt with this, and even then only at the prompting of her particular tax guy.

Finally: The clerk emphasized that freelancers making under $100,000 per year, may file an exemption to this tax altogether, as long as it's before the end of February.

Thanks to those who helped.
posted by evil holiday magic at 1:32 PM on April 6, 2009

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