I freelance too.
My system is different.
I make my customers pay my taxes.

Let's say I quote 1 dollar for a specific project.
They pay me $1 for my work, and they turn around and pay the government the appropriate taxes per that invoice number.

All in all, the customer pays about $1.45 total.
($1 for me, $.45 for taxes)

Oh, I get to collect whatever refunds may come my way at the end of the year.
It's all in the contract and how you present your pricing.

I am slightly under the competition's price level.
Once you figure in the tax advantages, I am way ahead.

To whoever mentioned being audited. You can look up the % of people that are audited based on AGI and basically see that they don't waste their time with small fries (and we are pretty much ALL small fries). I certainly am not encouraging anyone to cheat on their taxes, just pointing out that fear of being audited is not something most of us should be worried about. I also am only taxed on about half of my gross salary after deductions (1 kid, house, charitable giving, student loan interest, etc), but I am completely legal and can defend it anytime.

Having experienced a "special project audit", this is not entirely accurate. Our local IRS office decided that the real tax cheats of the world were waitresses who under report tips.

They audited every waitress/waiter in the town, going from restaurant to restaurant. The strategy was simple: take the gross receipts of the restaurant and assume that every waitress made 20% of that figure (normalized per hour worked). So by their definition, 100% of the waitresses and waiters were cheating, because nobody had 20% of the total revenue.

Nobody in that job class has the cash to mount a legal defense, so they all settled and took out loans to pay up. The IRS announced it as a wildly successful program.

It's also worth noting that in tax law, you are presumed guilty and must prove you are innocent. A very different bar to hit.

I was audited in 2009 for 2006. They categorized part of one of my minor deductions differently in their final analysis and I paid $300 in principal and interest. Then they audited me for 2007. They found that my return was correct as submitted even though the deductions were calculated similarly to 2006. What a waste of time and a bunch of unnecessary stress.

A simple tax code will never exist because it would remove power from the hands of the politicians.

Well, special project audits aside, here's an article with some info from 06.

The high points are:
And I'm not surprised once you are audited you are probably much more likely to be audited a second time.

I agree going after waiters and waitresses is low, but I'm willing to guess there are a large majority of them that do cheat on their taxes. My sister was a waitress (at high end J Alexanders) and ther other waitresses got really angry that she reported accurately because being the only one who did that she made the rest of them look suspicious.

And I agree the current tax system sucks. I'm all for the Fair Tax.

Yeah, and I was in one of those "more likely" categories since I grossed seven figures that year.

That's a big +1