How I learned to stop worrying and love the taxes

July 29, 2014 by Karen Reed, EA
Man asleep at desk

Years ago, I was just like most people when it came to taxes. Just the thought of doing my tax return gave me hives. I had been burned twice at tax time, owing a bunch of money I hadn’t expected to have to pay. The first time I had to go on a payment plan, which the IRS charged me for. The second time I had to take every last penny from my savings account to pay the Tax Man. Both were painful experiences that left me anxious every time I heard the word “taxes.”

How did I get over it? I took classes and learned about it, and understanding taxes took my fear away. Not to say that everyone shouldn’t have a healthy fear – the kind that jolts you into taking the steps needed to stay out of trouble.

Here are some basics you should know to avoid being surprised at tax time, or later on after the IRS has a chance to review your tax return:

1. Understand Your Tax Obligations for Any Income You Receive

If you are an employee, it’s important to make sure you are having the correct amount withheld from your paychecks. Don’t listen to that coworker who says he takes six exemptions and gets thousands back. Most likely, your tax situation is quite different, and you need to determine your withholdings based on your own circumstances. If you do your own tax return, your best bet is to use the planning tool in your tax program to figure out how much you should have withheld from your paychecks and/or how much estimated taxes you should be sending in if you are receiving self-employment (1099-MISC) income. If you are taking a distribution from a retirement plan or receiving a legal settlement or any other lump sum of income, understand your tax obligations before you take the money, and, most certainly, before you spend it.

2. Know Your Tax Obligations as a Self-Employed Taxpayer (or Independent Contractor)

When “nonemployee compensation” income is reported to you on a Form 1099-MISC, it is generally considered to be “business” income and is subject to self-employment (social security and Medicare) taxes. Although you may not think of your work activity as a business, the IRS classifies the income as "Business Income." And while you are eligible to deduct ordinary and necessary business expenses incurred in the course of earning this business income, certain requirements must be met in order to deduct expenses. For example, if you pay other people to help you in your business, you must issue a 1099-MISC or W-2 to those workers in order to deduct the amounts you pay them. And you must classify your workers correctly, making any payroll tax deposits timely, or be subject to stiff penalties including 100% payroll tax penalties.

3. Report All Income

If you receive payment in cash or do not receive a 1099-MISC reporting document for all of your income, report it anyway. Not reporting income is illegal, and the IRS has ways of finding out about it. One of these methods is the “Lifestyle Audit.” Just say, for example, you report only $17,000 in income, but your mortgage interest deduction is $28,000. The IRS just might want an explanation as to how you are living so large with so little taxable income. Even walking on the beach and tripping over a chest of gold is taxable; it’s known as Ascension to Wealth.

The fear we all have is about being financially ruined, having our bank accounts cleaned out, our possessions taken away, or even thrown in jail. But all of that can be avoided with a little education, some smart planning, and, of course, transparency about the income we receive. With some knowledge and understanding, you too can stop worrying and learn to love taxes!



Karen Reed, EA


During her years as an audit representative for TaxAudit, Karen successfully defended the company’s members throughout the entire federal and state audit processes, handled cases assigned to US Tax Court, and developed procedures to make the audit process easier for taxpayers. Karen attributes a great deal of her tax acumen to the six tax seasons she spent as a return reviewer, analyzing thousands of returns. Responding in writing to questions from taxpayers, she became familiar with the common mistakes self-preparers make. Karen was previously the manager of the Tax Education and Research Department and the Director of Communications at TaxAudit. Her tax advice has been featured in U.S. News and World Report, the Los Angeles Times, the Chicago Tribune, and other publications.


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