Guest Post: Clark Kent’s Taxes

Today we have a guest post from Martha L. Voelz, an associate with S.H. Jacobs & Associates LLC in New York that we met at New York Comic Con.  As we mentioned in a recent post, Clark Kent has quit his job with the Daily Planet to become a blogger.  Martha, who practices tax law, has written a post about some of the tax consequences of Kent’s newfound self-employment.  As with all of our posts, this post is not legal advice, does not create an attorney-client relationship, and does not necessarily reflect the opinions or views of the author’s employer.

Being Your Own Boss — Tax Consequences

With Clark Kent preparing to strike it out on his own in Superman #13, there are several  legal issues he faces as his own boss. As James Daily pointed out in his post, as an independent blogger and reporter Kent will have new intellectual property and liability issues. He also will have some tax differences as well.  For this post, I am sticking to Federal tax issues, but Kent will likely have state and local tax issues too.

As an employee, Kent’s share of income, Social Security and Medicare taxes were calculated and paid to the Internal Revenue Service (“IRS”) by his employer.  As his own employer, Kent now has to calculate and make these tax payments himself. Let’s start with the Social Security and Medicare tax differences, known as FICA and Self-Employment tax.

I. FICA v. Self Employment tax

When Kent received his pay stub from the Daily Planet, he would have seen withholding for his Federal income taxes and another  line notation called FICA. FICA stands for Federal Insurance Contribution Act, and this covers Kent’s tax contribution to Social Security and Medicare. FICA is found in §§ 3101-3128 of the Internal Revenue Code, which is part of the United States Code.

The total FICA tax rate is 15.3%, which is normally paid equally between the employer and employee.  Kent’s portion of FICA would normally be 7.65% and is broken down like this:

  • Social Security – Kent would pay 6.2% tax on his wages (including certain benefits) capped for the year at $110,100 in 2012 and will be capped at $113,700 in 2013. Anything Kent earns over the cap is not subject to the Social Security tax.
  • Medicare – Kent would pay 1.45% on his wages (including certain benefits). There is no yearly cap on this portion of the tax.

The reason for noting how FICA is normally paid is because in 2012 FICA is not working “normally”. In order to stimulate the economy, Congress reduced an employee’s portion of the Social Security part of FICA to 4.2% in 2011 and kept that reduction for 2012. This reduction is not set to continue in 2013. If Kent was working at the Daily Planet, when he received his first pay check of 2013 he might have been shocked by the reduction in his take-home pay and the sudden “increase” in the FICA line.

What makes this different for Kent as a self-employed taxpayer is that FICA does not apply. Instead self-employed taxpayers contribute to Social Security and Medicare under the Self-Employment Contributions Act of 1954, known as the Self-Employment Tax. This tax is found under §§1401-1403 of the Internal Revenue Code.

On its face, the Self-Employment Tax seems harsher because the taxpayer normally pays all 15.3% of the tax, which under FICA is split between the employer and employee.  However, the same 2012 reduction to the employee portion of the Social Security tax applies to the Self-Employment Tax. This means in 2012 the Self-Employment Tax rate is 13.3% and the breakdown would be as follows:

  • Social Security – Kent would pay 10.4% tax on his net earnings with the same income caps in 2012 and 2013 as FICA.
  • Medicare – Kent would pay 2.9% on his net earnings.

There are some additional differences in how the Self-Employment Tax is calculated to even out the differences between this tax and FICA.

First, the Self-Employment Tax is calculated on net earnings of the business and not the gross income. Net earnings are the amount Kent earns reduced by certain business expenses he may have during the year. Second, a portion of the Self-Employment Tax Kent paid may be deductible on his federal income tax return. This in turn may put Kent in a lower tax bracket and reduce his federal income tax.

II. Estimated Tax Payments

By becoming self-employed, Kent will have to calculate and pay income tax and Self-Employment Tax on his own. He will have to do this by making estimated payments to the IRS using Form 1040-ES. This form will help Kent calculate both his Federal income and Self-Employment Taxes.

He will need to file and make payments for each quarter to avoid an underpayment penalty. Quarterly estimated payments are due April 15 (for January, February and March), July 15 for (April, May and June), October 15 (for July, August and September) and January 15 of the following year (for October, November and December). If the due date falls on a Saturday, Sunday or Holiday, then the due date is typically the following business day.

Filing and payment is considered completed on the mailing date, and it is a good idea for Kent to send anything to the IRS via Certified Mail Return Receipt. This is his insurance should the IRS allege he missed a payment or filing deadline. Alternatively, he can make his quarterly estimated payments using the Electronic Federal Tax Payment System.

III. Happy New Year! – 2013 Tax Surprises

There are a few tax surprises in store for Kent and the rest of us taxpayers between the 2012 and 2013, in addition to watching our Social Security tax payment revert back to its normal amount.

First, some taxpayers may have to make an Additional Medicare Tax payment. If Kent makes over $200,000, then an Additional Medicare Tax will kick in. For every dollar over $200,000, he will pay Medicare Tax at 2.35%. (I assume for the rest of this post that Kent is not getting married in 2013 and has a taxpayer filing status of “Single”.)

Second, the Federal income tax brackets are set to revert to tax rates we last saw under President Clinton. The bottom income tax rate goes from 10% to 15% up to a maximum tax rate of 39.6%. Assuming Kent has an adjusted gross income between $35,351 and $85,650, his tax rate will go from 25% to 28% in 2013. This assumes that Congress does not make tax code adjustments connected to the “Fiscal Cliff” situation, which is still up in the air as of this writing. [Ed. note: the fiscal cliff has apparently been avoided, but if Kent makes more than $400,000 per year then he would pay 39.6% on income above that level.]

One of the best things Kent can do is read up on his obligations as a self-employed taxpayer and check out  the following IRS publications: Publication 334 –Tax Guide for Small Business and Publication 505 – Tax Witholding and Estimated Tax. If he doesn’t want to tackle this himself, hiring a certified public accountant is the best thing he can do. (Plus, the expense is a tax deduction in his new life as a self-employed reporter!)

26 Responses to Guest Post: Clark Kent’s Taxes

  1. I have the same problem with this post and the earlier superhero journalists post–it doesn’t seem to be about Clark Kent or superhero journalists at all. It’s a generic post about self-employed people or journalists. It’s technically about Clark Kent because you’re using him as an example, but Clark’s particular circumstances (never mind Clark’s superhero-related circumstances) aren’t really affecting the answer. It would be like pointing out that Clark Kent rents an apartment, and then writing a blog post about the laws concerning renting of apartments.

    • To be fair, it’s early days yet on the “Clark Kent quitting his job” storyline, so there isn’t a lot of specific material to work with. But, like the story in which Superman threatened to renounce his US citizenship, it caught the attention of the media (NPR, CNN, USA Today, etc). So with a lot of people talking about it we thought we’d discuss the legal aspects of the switch. Since the comics haven’t gone into much detail about it yet, our coverage has been somewhat speculative and generic. If the comics give us some details to work with, then we may revisit the topic again.

      • James Pollock

        So expand on some of the OTHER obvious areas of tax law that Clark generically falls under. For example, can he deduct the expenses of being Superman (like, say, the cost of maintenance in the Fortress of Solitude (assuming he uses it as a “home office”), or uniform expenses. Or even the cost of carrying liability insurance (Batman is probably self-insured, but he’s billionaire Bruce Wayne. Ditto for Green Arrow/billionaire Oliver Queen. Martian Manhunter takes a different approach, and is essentially judgment-proof.) I would expect different tax treatment for Clark’s expenses as Superman (being Superman is a hobby) from Peter Parker’s expenses as Spider-Man (Parker derives his income largely from his activities as Spider-Man.)

        I mean, an article on tax law that doesn’t even get to the deductibility of business expenses is a pretty shallow one.

        Heck, even the simple question of whether or not Clark is required to disclose income created by his activities as Superman to the IRS didn’t get covered.

        Now, I know that one of the purposes here is educational, and a discussion of the difference between being employed and receiving wages vs. being self-employed is one that is commonly missed (notably, the requirement for quarterly estimated tax and the difference between payroll and self-employment tax.) but there’s plenty more where that came from, and I’d expect a practitioner of tax law to be able to come up with lots of interesting twists regarding exemptions, deductions, and credits.

        Tax law is potentially very boring, so it’s even more important that the people who explain it work much harder to make it entertaining… I was fortunate to have this happen in law school (shout out for Prof. Bogdanski at L&C).

      • So expand on some of the OTHER obvious areas of tax law that Clark generically falls under.

        That would still be generic. But the bigger issue is that this post was already up to our typical post length. If you want more Superman tax posts, that’s fine, but we try to keep things around 750-1250 words.

        I mean, an article on tax law that doesn’t even get to the deductibility of business expenses is a pretty shallow one. … I’d expect a practitioner of tax law to be able to come up with lots of interesting twists regarding exemptions, deductions, and credits.

        We discussed that, and I think it will have to wait until we see what kinds of expenses he incurs. He might well not even incur enough to warrant itemizing. At this point all we know is that he’s apparently going to become a (possibly self-employed) blogger, and he shares an apartment, so doesn’t have a mortgage and is that much less likely to benefit from itemization.

        Heck, even the simple question of whether or not Clark is required to disclose income created by his activities as Superman to the IRS didn’t get covered.

        What income generated by his activities as Superman? There was a Silver Age story in which Superman was hounded by an overzealous IRS agent over the reward money he receives for nabbing bad guys (and which he promptly donates to charity), which we touched on in the comments to this post and discuss in more detail in the book.

      • James Pollock

        “That would still be generic. But the bigger issue is that this post was already up to our typical post length.”
        Yes, I left unsaid that this posting could have said what it had to say in about 1/3 the number of words actually used, leaving room for broader coverage. Especially given how much of the text was used to explain the consequences of the fiscal cliff, which changed at the last minute.

        “We discussed that, and I think it will have to wait until we see what kinds of expenses he incurs.”
        The only interesting thing about Clark’s taxes revolve around the fact that he’s Superman, and the expenses of being Superman going forward can probably be reliably extrapolated from his nearly 75 years of being Superman. One other issue… there’s a possibility that Clark won’t earn enough as a blogger to even have to file income taxes. Will that require him to supplement his income using Superman’s abilities? Hmmm. Or perhaps, since Batman knows Clark’s dual identity, perhaps Bruce will supplement Clark’s income (with gift tax implications… for Bruce, not Clark, of course.)

        “What income generated by his activities as Superman?”
        Superman has been known to do the old “charcoal into diamonds” trick, and has also engaged in (superfast) mining, he also (at least potentially) has endorsement income, all that I can recall off the top of my head, and
        I’m not a Superman fan, so I’m not at all familiar with most of his activities.

      • What I was getting at (admittedly opaquely) with regard to Superman’s income (as opposed to Clark Kent’s) is that except for a few stories in which the IRS comes after Superman directly, it’s highly unlikely that Clark would concern himself with paying taxes on Superman’s income, since doing so would tend to negate his secret identity. So Clark Kent’s taxes won’t be affected much by Superman’s earnings, unless he tries to launder that income somehow.

      • James Pollock

        Yes, that’s the point. The tax code doesn’t seem to have ANY provisions for secret identities, and section 61 (If I remember correctly) says that income includes ALL income, from whatever source derived. So if Superman IS receiving income, Clark should be declaring it. Evading taxes lawfully owed supports neither truth nor justice, although an argument could be made that it IS “the American Way”…

        I believe that the writers through the years have tried to get around that question by the dodge “well, Superman gives everything he earns to charity”, but that still doesn’t mean that failing to report the income is OK.

      • Martha L. Voelz

        What income generated by his activities as Superman?”
        Superman has been known to do the old “charcoal into diamonds” trick, and has also engaged in (superfast) mining, he also (at least potentially) has endorsement income, all that I can recall off the top of my head, and [sic]

        Turning a piece of coal into a diamond doesn’t give rise to immediate income, it does create an (arguably) more valuable asset. It would be as if I buy lumber and make a table out of it. That act by itself does not give me income I have to report.

        Now, if Superman sells the diamond he made from coal, the question becomes was this the sale of a capital asset or ordinary income? The two have different tax rates and consequences.

        I’m not sure of the mining circumstance, but without an agreement that Superman will be paid for his services, then there is no reportable income. He may have volunteered his time, something many people do for organizations, friends, family, etc. Hard to comment without more info.

        The Code does not yet require anyone to report “potential” endorsement contracts as long as they are cash-basis taxpayers. Generally, cash-basis taxpayers, which most of us are, means we don’t pay taxes till we have money in our hands. If Superman was only talking to a company and thinking about a deal or even if he was negotiating an endorsement contract he would not have to report any income till he has cash in his hands.

        Now the other income type not mentioned in the quote above, but within this thread is award and prize money. Typically, award and prize money is taxable to the person who earned it, even if they assign the payout to someone else and never physically receive the money.

        However, Code §74 permits a taxpayer to donate certain cash prizes to a charity and keep it out of their gross income. There are strict guidelines for this type of transfer in the Treasury Regulations and Revenue Procedure 87-54. Superman cannot, as an afterthought, make the donation as part of his acceptance speech and avoid the taxable income.

      • James Pollock

        “Now, if Superman sells the diamond he made from coal, the question becomes was this the sale of a capital asset or ordinary income? The two have different tax rates and consequences.”
        That’s assuming he sells the diamonds. My recollections are hazy (I haven’t read any Superman for about 25 years or so) but the situations that present themselves are A) he turns the diamonds over to a third party as reparations for damage done to property, and B) he uses them as collateral for a loan (sometimes of money, sometimes of some material property). In the first case, I see possible gift tax ramifications, and in the second, possible fraud (passing off “man-made” diamonds as natural.)
        But my real question is, does it make a difference if he does it (creation of diamonds and transfers of ownership of them) more or less frequently? Does he need to worry about being considered a dealer or manufacturer of diamonds?
        How would you adjust the basis for “and then Superman squeezed the charcoal really hard”? (there are a couple of variations here, depending on how ownership of the property changes before, during, and after the conversion.)

        “The Code does not yet require anyone to report “potential” endorsement contracts as long as they are cash-basis taxpayers.”
        I didn’t mean “potential” as in “he should get an agent, because he could for sure make some money pitching products”. I meant “he has done endorsements, and so that’s something that would have been income. Except I don’t remember enough details to remember if he actually got paid or not.” Alas, I don’t even remember what products he was endorsing (Every time I try to remember, I get stuck on the Marvel cast pitching Hostess brand snack cakes.)

        Assuming that Superman does have income that can’t be excluded, how SHOULD Clark proceed? (Assuming, of course, you aren’t afraid of giving him legal advice even though you aren’t licensed to practice in Metropolis, and assuming that Mr. Kent has expressly waived confidentiality.)

      • What I was getting at (admittedly opaquely) with regard to Superman’s income (as opposed to Clark Kent’s) is that except for a few stories in which the IRS comes after Superman directly, it’s highly unlikely that Clark would concern himself with paying taxes on Superman’s income, since doing so would tend to negate his secret identity. So Clark Kent’s taxes won’t be affected much by Superman’s earnings, unless he tries to launder that income somehow.

        It seems we already had a post on this. If Superman turns coal into diamonds then he has an income. Superman should pay taxes on this income but obviously he can’t admit to this income as Clark Kent. Logically Superman should file his own tax return except that his home address would not be Metropolis but the Fortress of Solitude near the North Pole. Depending on exact location of the Fortress of Solitude I think Superman should file a Canadian tax return. It doesn’t matter that he’s not a Canadian citizen as I have filed tax returns in the Philippines and here in Taiwan before. :)

      • Ken Arromdee

        Superman renouncing his citizenship is a specific plot element. Yeah, in some sense it’s an activity that anyone can do, but it’s not very common, and commenting on it is commenting on a specific element of a comic book, in a way that generic comments about becoming self-employed aren’t.

      • “For example, can he deduct the expenses of being Superman (like, say, the cost of maintenance in the Fortress of Solitude (assuming he uses it as a “home office”), or uniform expenses.”

        Would Superman/Clark Kent be able to deduct expenses for the Fortress of Solitude? I seem to remember a post about Batman deducting the Batcave, but the batcave is in Gotham. The Fortress is at the North Pole, so not in sovereign US territory. Wouldn’t that then prevent him from claiming it on his US tax returns? Though it seems like he shouldn’t have to pay taxes on it at all – it is in international territory, so there is no government to collect taxes on it, and it’s stationary, so it wouldn’t even be like a boat that operates in international waters (though the boat would still be registered in a particular country) – but he shouldn’t get a write-off either.

      • James Pollock

        Ann, you’ve confusing paying taxes with claiming a tax deduction. Nobody’s suggested that Clark should pay (property) taxes on the Fortress, for the reason you state, it’s outside anyone’s taxing jurisdiction (although there is a current rush of nations claiming the Arctic seaflorr, now that it seems there’s likely to be oil under it.)

        The question is whether or not Clark is entitled to deduct some of his income as expenses related to generating it. People who have a legitimate claim to the “home office” deduction (probably around 10-15% of the people who try to claim it), get to REDUCE their taxes because they spent some of the money they earned in a way that’s directly related to the generation of that income. If you operate a business, you get to deduct the business expenses related to that business, including rent on office space. Clark doesn’t pay rent on the Fortress, but there may still be deductions related to its upkeep (the heating bill must be sky-normous.)

    • Personally, I rather liked the post. It is true that it was a bit less particular to superheros than some of the other posts. But it was a well written and interesting piece that ties in nicely with a major plot point of one of the biggest comic franchises around.

  2. Hmm… somewhat tangential, but Michael Stackpole wrote a story named “In Hero Years, I’m Dead” which follows Coyote, sort of a Moon Knight knockoff (Batman would work too, except that Nightgaunt is more explicitly the “Batman” of the series) as he returns to his town. He reveals that he knew the secret identity of Graviton, the Superman expy, some time before. The way in which he realized? Graviton, being sun-powered like Superman, never deducted sunscreen as a business expense when going to bizarre foreign locales.

    • Martha L. Voelz

      Interesting. Now my question is what is Graviton’s day job? How would the absence of a business expense for sunscreen purchases make someone stand out? It is unusual for sunscreen to be an expected business expense.

      Then of course I’d wonder if that expense is a possible tax deduction because not all business expenses are tax deductions.

    • Seth Finkelstein

      That sounds very contrived. Does Coyote really expect the guy to deduct every little item? Many people wouldn’t bother with saving the receipt for a bottle of sunscreen, especially if they bought it while doing otherwise personal grocery shopping. Or maybe he buys a big bottle of sunscreen at the start of summer vacation for his beach use, and has enough left over for later business trips. Or perhaps there’s an admin assistant who bundles it all up into a services package and calls it generic “supplies”. There’s only a few superheroes, but there’s a lot of businesspeople who aren’t fanatical about deduction documentation.

  3. Martha L. Voelz

    It is true there are lots of interesting tax issues to being self-employed, but without knowing more about Clark Kent’s work, my discussion is limited. I think most people are not aware of the basic differences between employee and self employed tax payments and it makes sense to start with that background and build from there.

    Right now this is exciting from a tax perspective because of the big changes in the tax law between 2012 and 2013. The “holiday” we have had on paying Social Security is going to be felt in everyone’s pocket as we start getting our first 2013 paychecks. It also will be a big adjustment to Kent as he starts paying all of the Social Security and Medicare taxes. Lots of folks who start out on their own are often shocked by this.

    Then there is the American Taxpayer Relief Act of 2012 (H.R. 8), which has been moving quickly through the Senate and House. This bill, which should be signed into law tonight, would help Kent in a big way. Based on what I’ve read in the bill today, it seems we’ll be keeping some of the income tax cuts permanently, so the bottom tax rate will be 10% and go up to a maximum of 39.6%. The interesting thing is keeping all of those levels in between (15, 25, 28, 33 and 35%), which would be great news for Kent. He might not be harshly thrown into the 28% bracket.

    What makes this so entertaining? Cash in hand, of course. If Kent pays less in income taxes, perhaps he’ll be able to afford an apartment without a roommate. Would save on those embarrassing moments when you walk in on your roomie sharing the shower with a date.

    • “It is true there are lots of interesting tax issues to being self-employed, but without knowing more about Clark Kent’s work, my discussion is limited.”
      What you have to do is the same thing law profs do… start making up hypotheticals.

      “I think most people are not aware of the basic differences between employee and self employed tax payments and it makes sense to start with that background and build from there.”
      If I seemed overcritical, I apologize. I have no doubt that many, many people are unaware of how the tax systems work, and how to ninimize the impact of it with regards to their own wealth, and keeping same. For example, I suspect that many Republicans will blame Obama and the Democrats for their payroll taxes going up, without ever realizing that the rates went down because the Democrats included the “payroll tax holiday” provisions into (gasp) the stimulus bill (ARRA).

      “If Kent pays less in income taxes, perhaps he’ll be able to afford an apartment without a roommate.”
      Well, he DOES have the Fortress of Solitude to fall back on, for those “I want to be alone” moments.

      • What you have to do is the same thing law profs do… start making up hypotheticals.

        We do that to a limited extent (this post, for example), but we try to avoid making up stories out of whole cloth. For one reason, we aren’t fiction writers, so our stories would tend to be boring and contrived, like the ones most law professors come up with, frankly. There would be a terrible temptation to make up pat just so stories that perfectly fit the legal conclusion we want to come to.

      • James Pollock

        I’ll rephrase.

        What you have to do is the same thing GOOD law profs do, start making up hypotheticals THAT ARE INTERESTING AND RELEVANT.

        For example, here’s a hypothetical solution to the “reporting Superman’s income” problem: Suppose Superman creates a general partnership, SUPERKENT, which has as ostisible partners both Superman and Clark Kent. He then arranges it so that all income for either becomes income for the partnership. The partnership files a tax return declaring all the income. Clark files an individual return claiming all the partnership income as his own; Superman does not file. Problem solved. (New problems erupt, of course).

        In retrospect, either Bruce Wayne or Lex Luthor would make better cores for this topic; they’ve both been self-employed longer and have used some different dodges to keep straight with the tax man (or not… maybe that’s how they’ll finally “get” Lex Luthor, on a tax charge).

      • James Pollock

        Alternatively, Superman could set up a corporation, assign all his income to the corporation, and pay corporate income taxes. Depending on how much there actually is is earnings, he’d be worse off than claiming them individually (assuming Superman objects to paying taxes, of course). I wonder if you’d have minimum-wage and working-conditions issues since Superman wouldn’t be paid at all and works under some fairly challenging conditions…

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  5. Superman and Clark couldn’t file separate tax returns because separating the income could put both into lower tax brackets and if it ever become known they are the same person, the IRS would definitely audit him and he would probably be prosecuted for fraud. I like the idea of setting up a partnership to collect Supe’s income and paying the taxes. In that case it could be argued that Superman is a volunteer and not a paid employee. Since he donates his rewards to charity anyway, he might as well set up his company as a non-profit. Clark could then draw a salary from the NP and pay his individual income tax off that salary.

    • As I said, other problems erupt. A partnership of one person’s two identities isn’t a partnership. I’m sure there is a way to do it (not for superheroes protecting their secret identities, but perhaps for authors writing under a pseudonym).

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