Posted on 10/16/2008 12:21:07 PM PDT by Daus
Parden the vanity but the complete lack of understanding by the Media and the Obama campaign on how small business owners are taxed is driving me a bit nuts (as a small business owner myself).
You hear all the "There is NO WAY Joe the plumber is ever going to make $250,000 a year!" Or any plumber for that matter...
What people need to understand is that small business owners (small C Corp, S Corp and LLC) are going to be taxed on what they take home in their paycheck AND the money that the company itself makes during the year.
Why does that matter? Because the owner is being taxed this year for money he/she leaves in the company for next year and beyond. So you are taxed for money you never really get yours hands on.
For example. Joe goes into business. Hires 5 plumbers. Pays himself a tidy $125,000 a year (pretty good, and not high enough to trigger Obama's huge new taxes). "See! no problem", they say and that is where everyone stops the analysis. The trick is... The company itself goes on to take in revenue of $600,000/year. Joe's margins are good. Let's say 25%. That means the company is going to clear $150,000 for the year. Joe being a wise business owner in these times wants to keep that $150,000 in the business so he can make payroll come Jan 1 and then plan for expansion in the coming year (hire more people, buy more trucks, train his workers).
But guess what? Joe can't do that. The $150,000 the company nets goes right to his taxable income which is now reported as being $275,000 once it's combines with his take home pay for the year and he has to come up with the 35% (and going up under Obama) even though he doesn't have that other $150,000 in hand.
And oh yeah, the inflated income for Joe also means he is WAY over any threshold for the myriad of tax credits being bandied about, he can forget about that.
So what is Joe going to do? He's going to have to pull a large chuck of profit out of the business to pay his taxes for the year, reducing what he can do in the following year. All of which will be taxed at the highest possible rate. So there goes $50K of the $150K. If joe is smart he's going to keep $50K on the side for payroll/expenses/rainy day, and then if he is lucky he has $50K for expansion. Well maybe because before long he will have to make his quarterly estimated tax payments for next year... The beast has to be pre-paid ya know...
How much more taxes would “Joe” be paying if he was making that $250K under Obambi’s plan ?
My paycheck is issued by an outfit which makes over $250K annually. I wonder how many pay checks are issued by those making less than $250K?
I like how you explained it. Don’t you also have to figure in health care benefits for your employees (if you have over 20 employees in CA, I think, you are mandated to give them health insurance).
What bugs me about this is that Obama will tax the small business owner, which includes retail stores (hardware chains/moms and pop stores, etc). So they fold and it’s cheaper for people to go to Wal Mart. So then WalMarts profit margins increase, but basically they are treated as the bad guys, when it’s the democrats who actually, by refusing to support small business owners, force people to shop there because the smaller places can’t stay afloat in retail goods.
Thank you so much for this post. This is true. As an LLC member, individuals are taxed annually for money the company has earned, even if it is not paid out to the members. I used to get hit with this every year until I sold my business.
If they give me $3000 for hiring people...I’ll hire them on 31 Dec and fire them on 1 Jan ;-)
Joe would be paying 39% at Obama’s new highest tax bracket and would not see a dime of the credits other non-business owners who get.
Well said. Might I add, then, the time comes, when JOE THE PLUMBER, just can’t take it anymore, lays off his employees, becomes a one man shop and tries to hang on to what he makes the best he can.
CONGRATULATIONS JOE, YOU’RE RICH!
Yes, I have an S-Corp myself as well as working for a big tech company. My S-Corp is easily approaching this 250k limit by next year, not that I’m going to make anywhere close to that.
When (and if) you plan your business model (ie, for asking for a loan at a bank), you have to learn these simple frivolous details which non-business owners and the usual media suspects won’t know.
In the video clip, Joe says that he is "buying" the business. When you buy a business, normally you take out a loan and pay it back over time. Sometimes the prior owner will hold the loan.
But the tax rules say that principle paid on the loan is not deductable. Therefore, those principle payments are TAXABLE even though you never see the money!
If Joe has to pay half a million dollars for this business (very possible), and he pays it to the prior owner over 5 years (typical deal), then on average each year he pays back $100,000 in principle (less in year 1, more in year 5). He only gets a fraction of that offset by depreciation in a business like his. Most of that $100,000 counts as his income, he owes taxes on it and if Obama gets his way at a much higher tax rate.
The effect? It actually makes just about every small business worth less. Buyers will take into account the tax ramifications of buying a business. If general taxes go up, the business is worth less. PLUS: Obama will raise the cap gains rate, making all small businesses AGAIN worth less money!
The bottom line: in several different ways, Obama's tax policies make it less profitable to start, buy, or own a small business. Small businesses create 2/3 of all new jobs.
You do the math.
Add in the plans Obewanataxu has for Employment taxes and small business is going to get Hammered!! Removing the cap on employment taxes is getting no where the attention it deserves. Talk about a job killer! It will likely eliminate one in 6 jobs in small to mid-size privately held companies.
Big Surprise to the Senators Government and employees of companies small or large. Be nice if John McCain could have articulated that last night.
Very good explanation. I “made” a lot of money according to IRS rules even though I left money in the business. My solution to higher taxes is to cut expenses, contract instead of hire and look for ways to delay deposits and payments.
Anyone ever hear of John Galt? (hint: Ayn Rand)
You are right. The gommint has its hand in your pocket and gets its take no matter what. You are working FIRST for the gommint, then if there’s anything else, for your business and maybe for yourself.
We can’t let this communist get elected.
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