- Joined
- Mar 11, 2016
@actually made one big assumption in all his math: That Phil was only on an installment plan for income tax, not payroll tax. My math is in the spoiler but the short version is that income tax if Phil didn't deduct business expenses is about as much as income + payroll tax combined if he did deduct $5,000 / month.
For non-Americans: Payroll tax is tracked and paid separate from ordinary income tax because it is earmarked for our old-age benefit programs and the formulas for amount owed + deductions are different from income tax as well. That being said all my paystubs + federal tax returns have listed both my income and payroll tax payments, there is not a practical difference to me since they are both money I have to pay to the government, and I cannot think of a reason someone would have a reason to look at one but not the other.
To keep math very simple I will assume Phil made $120k (which is consistently a best estimate or in the range of estimates for Phil's income) and use 2021 tax rates (this is because I was lazy, older years' rates would be harder to find and 2022 rates would be an apples-to-oranges comparison because rates are inflation-adjusted).
Approach 1 - no business deductions, income tax only.
Taxable income = $120,000 - $12,550 standard deduction = $107,450
10% * $9,950 = $995
12% * ($40,525 - $9,950) = $3,669
22% * ($86,375 - $40,525) = $10,087
24% * ($107,450 - $86,375) = $5,058
This all adds up to $19,809 whereas Phil claimed to owe $17k-18k. This difference is small enough I'm inclined to say it's due to a combination of slight changes in tax rates, much smaller but more defensible business writeoffs, money Phil was able to pull together without help, and gifts from his parents.
Approach 2 - $5,000 / month business deductions, income and payroll tax.
Income subject to payroll tax = $120,000 - $5,000 in business expenses / month * 12 months = $60,000
Note that there is not a standard deduction for payroll tax, that only applies to ordinary income tax. According to this site (the IRS does not provide a nice, clean listing of payroll tax rates) payroll tax rate is a flat 15.3% on the first $147,000 of income and 0% above it. Technically the payroll tax is 7.65% on the employer and 7.65% on the employee, but since Phil is self employed he is considered both and is responsible for the entire 15.3%.
Payroll tax = 15.3% * $60,000 = $9,180
Income subject to income tax = $120,000 - $5,000 in business expenses / month - $12,550 standard deduction (yes he could claim business deductions + standard deduction concurrently) = $47,450.
10% * $9,950 = $995
12% * ($40,525 - $9,950) = $3,669
22% * ($47,450 - $40,525) = $1,523.50
This adds up to $15,367.50 or about $2k-3k less than the $17k-18k Phil claimed to owe. There are any number of things (cost of hiring an accountant, IRS penalties and fees, Phil wanting extra money because he's that sleazy) that could explain the difference.
In summary - @actually did the math right on what Phil brought in and the income tax he'd pay without business deductions, but unless we know whether payroll tax is included in his installment plans we can't say whether Phil claimed business expenses on his returns. As a layperson I'm inclined to say Phil probably got flagged for not paying payroll tax since that's part of normal withholding + returns but I don't have the accounting/legal/IRS enforcement background necessary to say for sure.
Edit: Two other things I'll point out from the begruptcy:
First, the random jump in made-up business expenses to $9,000 in July of 2019 was not necessary to lower Phil's income to qualify for Chapter 7: If you exclude July 2019 from his form 122A his income increases to $4,962.36 / month or $59,548.32 / year. This is still much less than the $78, 823 cutoff for Chapter 7 eligibility in Washington (see page 2 of his form 122A) so there was probably some basis for the $9,000 value (like summing up all PayPal charges for the month). To head off the next, perfectly reasonable question of why his income dropped following July 2019 I can't be sure but my first guess would be that Phil spent some or all of the money his mother gave him for his wedding/to get on an IRS payment plan on gacha and that ran out in the July-August 2019 timeframe. This would explain his "expenses" dropping significantly in September 2019 while defaulting on his credit cards after meeting with Rochelle in October 2019 would explain why they then started to tick back up.
Second, Rochelle (Phil's begruptcy attorney) did not certify that the information was correct, let alone on pain of perjury. She signed twice, both on the initial filing - once to certify she had explained bankruptcy eligibility and relief (the statement about 11 USC§ 707(b)(4)(D) does not apply because that section governs dismissal and conversion to Chapter 11 or 13), and once to specify the fee she received and the services rendered. Considering how her fee explicitly did not cover adversary proceedings in Phil's case I suspect she runs a bankruptcy mill - offer an ultra low fee, provide the bare minimum of service, hope that the sheer volume of clients is enough to keep up her income.
Edit x2: If you look at Rochelle's website she does not cover Chapter 11 (business bankruptcies) which supports my "mill" theory - all but the smallest of failing businesses will have enough debt to enough creditors that objections to discharge are a real possibility and the debtor should prepare for these, whereas objections to discharge in Chapter 7/13 (especially for debtors who can only afford Rochelle's bare-bones services) are much rarer.
Edit x3: If I'm wrong about 11 USC§ 707(b)(4)(D) and it did apply to Rochelle in the begruptcy then her signature is still not hard proof of anything. Here is what that law says:
and here is the preceding section:
To keep math very simple I will assume Phil made $120k (which is consistently a best estimate or in the range of estimates for Phil's income) and use 2021 tax rates (this is because I was lazy, older years' rates would be harder to find and 2022 rates would be an apples-to-oranges comparison because rates are inflation-adjusted).
Approach 1 - no business deductions, income tax only.
Taxable income = $120,000 - $12,550 standard deduction = $107,450
10% * $9,950 = $995
12% * ($40,525 - $9,950) = $3,669
22% * ($86,375 - $40,525) = $10,087
24% * ($107,450 - $86,375) = $5,058
This all adds up to $19,809 whereas Phil claimed to owe $17k-18k. This difference is small enough I'm inclined to say it's due to a combination of slight changes in tax rates, much smaller but more defensible business writeoffs, money Phil was able to pull together without help, and gifts from his parents.
Approach 2 - $5,000 / month business deductions, income and payroll tax.
Income subject to payroll tax = $120,000 - $5,000 in business expenses / month * 12 months = $60,000
Note that there is not a standard deduction for payroll tax, that only applies to ordinary income tax. According to this site (the IRS does not provide a nice, clean listing of payroll tax rates) payroll tax rate is a flat 15.3% on the first $147,000 of income and 0% above it. Technically the payroll tax is 7.65% on the employer and 7.65% on the employee, but since Phil is self employed he is considered both and is responsible for the entire 15.3%.
Payroll tax = 15.3% * $60,000 = $9,180
Income subject to income tax = $120,000 - $5,000 in business expenses / month - $12,550 standard deduction (yes he could claim business deductions + standard deduction concurrently) = $47,450.
10% * $9,950 = $995
12% * ($40,525 - $9,950) = $3,669
22% * ($47,450 - $40,525) = $1,523.50
This adds up to $15,367.50 or about $2k-3k less than the $17k-18k Phil claimed to owe. There are any number of things (cost of hiring an accountant, IRS penalties and fees, Phil wanting extra money because he's that sleazy) that could explain the difference.
In summary - @actually did the math right on what Phil brought in and the income tax he'd pay without business deductions, but unless we know whether payroll tax is included in his installment plans we can't say whether Phil claimed business expenses on his returns. As a layperson I'm inclined to say Phil probably got flagged for not paying payroll tax since that's part of normal withholding + returns but I don't have the accounting/legal/IRS enforcement background necessary to say for sure.
Edit: Two other things I'll point out from the begruptcy:
First, the random jump in made-up business expenses to $9,000 in July of 2019 was not necessary to lower Phil's income to qualify for Chapter 7: If you exclude July 2019 from his form 122A his income increases to $4,962.36 / month or $59,548.32 / year. This is still much less than the $78, 823 cutoff for Chapter 7 eligibility in Washington (see page 2 of his form 122A) so there was probably some basis for the $9,000 value (like summing up all PayPal charges for the month). To head off the next, perfectly reasonable question of why his income dropped following July 2019 I can't be sure but my first guess would be that Phil spent some or all of the money his mother gave him for his wedding/to get on an IRS payment plan on gacha and that ran out in the July-August 2019 timeframe. This would explain his "expenses" dropping significantly in September 2019 while defaulting on his credit cards after meeting with Rochelle in October 2019 would explain why they then started to tick back up.
Second, Rochelle (Phil's begruptcy attorney) did not certify that the information was correct, let alone on pain of perjury. She signed twice, both on the initial filing - once to certify she had explained bankruptcy eligibility and relief (the statement about 11 USC§ 707(b)(4)(D) does not apply because that section governs dismissal and conversion to Chapter 11 or 13), and once to specify the fee she received and the services rendered. Considering how her fee explicitly did not cover adversary proceedings in Phil's case I suspect she runs a bankruptcy mill - offer an ultra low fee, provide the bare minimum of service, hope that the sheer volume of clients is enough to keep up her income.
Edit x2: If you look at Rochelle's website she does not cover Chapter 11 (business bankruptcies) which supports my "mill" theory - all but the smallest of failing businesses will have enough debt to enough creditors that objections to discharge are a real possibility and the debtor should prepare for these, whereas objections to discharge in Chapter 7/13 (especially for debtors who can only afford Rochelle's bare-bones services) are much rarer.
Edit x3: If I'm wrong about 11 USC§ 707(b)(4)(D) and it did apply to Rochelle in the begruptcy then her signature is still not hard proof of anything. Here is what that law says:
and here is the preceding section:
A few things to notice here - even if the business expenses were false (they were), Rochelle could avoid any sort of discipline by throwing Phil under the bus - come up with some BS about how she questioned whether all the PayPal charges were really business expenses but he insisted repeatedly that they were. Same goes for streaming services ("I do reviews on my channel") and fast food ("I have a side series called 'DSP Tries It'") if he wrote those off. You have to admit that a ~50-year-old woman saying "I had to defer a little to my client on these expenses because I don't understand videogames or YouTube" is a plausible defense even if it is a lie.
Edit: To adjust formatting and add some extra discussion of the begruptcy.
Edit x2 and 3: Adding more information on Phil's bankruptcy attorney and correcting payroll tax rate from 15.2% to 15.3%.
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