Self-employed Tax Gap

Physician's Money Digest, April15 2004, Volume 11, Issue 7

Are you contributing to the tax gap?Under current laws, the self-employed,including many physicians, have to setaside funds to make quarterly tax payments.Most also pay the 15.3% self-employmenttax to fund Social Securityand Medicare. According to NinaOlson, the IRS taxpayer advocate(www.irs.gov/advocate), underpaymentof the tax by the self-employed amountsto approximately one third of the $310-billion tax gap in 2001 (the amount theIRS believes was owed to the governmentbut was not paid). This meansthat others have to pay more to makeup for the gap, which decreases confidence in the tax systems. To alleviatethe shortfall, Olson recommends thatemployers withhold 5% on paymentsmade to independent contractors whodon't maintain an inventory. She alsowants Congress to do their part in bettermonitoring their contractors' performancesand enacting withholdingrates for trades and industries. She proposeda 3.5% withholding rate for independentcontractors with inventories.