You are currently browsing the category archive for the ‘soak the rich’ category.

Most small business owners in the United States structure themselves as a business entity in the simplest way possible – sole proprietor or simple partnership if they have a low liability risk, LLC or subchapter-S Corporation for greater liability protection.

These four main business structures all feature something few are talking about today – the flow-through of all income to the owners personal income and his 1040.

How the proposed budget and other potential changes may affect his budget can and will directly affect those (s)he employs because the bottomline is the owners income.

Let’s set up a hypothetical couple, married, two kids.  The husband is the primary earner since the kids are small and his wife helps with the business, but isn’t an employee.  His business nets him an income of $300,000 a year.  After federal taxes, social security and medicare (which he must pay both sides of, employer and employee) and living in a no state tax state, taking nothing but the standard and personal deductions, takes home $209,181 each year.  Note, he paid out, in various taxes $90,819 of his earnings from his business.

A very respectable take home at the end of a year of hard work – taking home about $17,430 a month.

How will the family situation change, if the proposed changes take effect?

All things remaining the same, except his federal taxes going up, his take home will be reduced to $196,741; stated another way, doing the same exact thing he’s always done, he’ll now have to pay $9,440 more to the government, taking $787 less home each month.

Would your budget be affected if you had to take a $787 hit on your take home money?

Could it get worse for our business owner?

Sure could, especially if the powers that be decide to remove the cap on social security taxes – abolish the limit that currently exists that taxes the first $106,800 of income so that all income is now taxed.

Doing that, on top of the above hike in federal taxes now will take another $23,957 out of his household budget because right now he pays $13,243 for his social security contribution and will, if the cap is removed, then have to pay $37,200 instead.

Now this couple isn’t simply taking a $787 monthly hit on their income for their household, they’re now taking $2783 LESS home each month, with their annual take home reduced to $172,784….or a 28% reduction in his take home, taking his taxes and social security from $90,819 for a year to $127,216!

Now yes, there’ll be naysayers who can’t quite fathom why this is potentially a problem in our economy, they’ll say this couple should pay the higher amount, they can afford it. 

How many out there can truly say, with a straight face, they can easily take a 28% reduction in their take home pay?

If the hypothetical business owner doesn’t figure out how to adjust income to pay less taxes, he and his wife are going to sharply cut spending (they no longer have the same disposable income) and likely will begin to look at whom to layoff in their business since the wife can step in and do that work instead of their paying someone else to do it.

Either way the economy loses – be it through spending less on services and convenience, or by someone getting laid off to make up the $36,397 in additional tax burden the couple will have to face and deal with.

Take $36,397 out of this couple’s disposible income equation and you’re likely to be hitting the service sector – they’ll reduce meals out, salon services, cleaning services, etc. because they have $3,033 LESS to spend on services each month – and it will domino through the economy as each service provider makes less, they’ll need to cut back on their own use of services, and so on and so on.

Just food for thought, especially when you consider that in an interview, Obama told Fox News:

“In terms of raising the cap on the payroll tax, right now everybody who’s making $102,000 or less pays 100 percent of payroll tax on 100 percent of their income. There are about 3 percent to 4 percent of Americans who are above $102,000 in income every year. So if you want to talk about who’s middle class, me giving cuts to folks making $60,000 or $70,000, and potentially asking more from friends of mine like Warren Buffett. That’s a debate I’m happy to have…because it’s the people making $75,000, $50,000, $60,000 who are hurting.”

Over the last week or so much has been debated about Obama’s new budget and his plans for the future, especially his plans for those who find themselves in the upper 5% of income earners in the United States.

I’d like to use this post to set the record straight on something first, we keep hearing that the various changes to the tax code will not affect anyone making less than $250,000 a year.  We hear that 95% of workers will not be affected.  We’re told this must be done to equalize the disparity in income and targeting the “rich” to pay more is fair because they can afford to pay more.

First things first – where you fall for taxes depends on your filing status.  We are told that the two upper tax rates are those that will rise – the current 33% will rise to 36% and the current 35% will rise to 39.6%, all other tax rates will remain the same.

While we keep hearing this magical number of $250,000 a year in earnings – think again, it’s really lower than that number if we look at filing status and when each hits the current 33% and 35% tax rates on earnings. 

To be clear too – this isn’t just your paycheck, it’s your earnings and includes interest earned, dividends, previous tax year refunds from your state or local government, alimony received, etc. on this list of income you list on your 1040 to determine your adjusted gross income.

If you’re single, you’ll hit the 33% tax bracket once your income (including all the goodies above to determine your AGI) hits $175,000; married with no kids, you’ll see yourself hit the 33% tax bracket at $220,000 of income; and if you’re married with two kids, you’ll see the 33% tax bracket when you reach $230,000.

Notice, each of the above are UNDER $250,000 – and they’re all going up! 

So don’t believe the media when they keep singing the $250,000 threshold, it’s bogus and a fairy tale.

Interesting finding for me today – I wanted to understand how it is that those in the upper income brackets aren’t paying their fair share, so I crunched some numbers.

I’m still trying to understand how it’s unfair that, say a married couple with two kids, with an income of $150,000 – who to keep this simple only has the standard deduction and personal deduction – pays $23,963 in federal income taxes, but the married couple making twice as much with two kids pays $71,052 in federal income taxes – or to put it bluntly 2.9-times as much tax rather than twice as much for making twice the income!  That’s somehow not quite fair enough yet?  We have to increase how much is taken from the couple earning $300,000, despite their already paying more than twice as much as the couple earning half what they do?

So now, the powers that be have somehow come to the conclusion that $71,052 isn’t enough, that instead they’ll take $82,023 from the couple making $300,000 to be “fair”? 

I don’t know about you, but taking home $914.25 LESS each month will certainly lead the family with the $300,000 income to figure out how to either live on less OR PAY LESS TAXES because I haven’t even touched on the mortgage deduction being reduced, charitable contribution deductions being reduced, capital gains increased, and the potential that the cap on social security taxes may – it’s being discussed right now – be lifted so all income is affected, not just the first $106,800. 

That last one is going to be the thousanth cut for employers, especially the 23-million small business owners out there that employ greater than 116-million Americans!