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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.”

Some will do almost anything to attempt to make it seem like Republicans only promote tax cuts for the “rich”.  Today, TaxProf Blog provided a post, Republican Tax Cuts Skewed Toward Rich, with this graphic:

From TaxProf Blog

From TaxProf Blog

Hmmm…

That sure looks like the proposed Republican tax cuts favor the “rich” doesn’t it?

Wait a minute!  How much money are we talking about for each level of income in the graphic above?

Ah, see TaxProf didn’t bother to provide any context for his readers.  Instead, he’s leaving it up to his readers to figure out what he means by “rich”.

This graphic provides a bit more context:

taxcuts21

So, 94% of all the proposed tax cuts go to those households with $199,999 or less income.

What I find purposely misleading is the category “next 15%” with households between $92,500 and $199,999.  That is the widest gap of income in TaxProf’s graphic.  It’s hard to know how many households are at the $92,500 level versus the $199,999 level since they’re all lumped together, leaving us thinking many are at the higher end of the spectrum.

The US Census actually let’s us know how many households are in each and every income group! 

Of the 15% of households with incomes between $92,500 and $199,999:

  • 16% of households have income between $92,500 – $99,999; this income level is 3% of US households
  • 64% of households have income between $100,000 – $149,999; this income level is 9.9% of US households
    20% of households have income between $150,000 – $249,999; this level of income is 3% of US households

So, 80% of those in the income group TaxProf wants us to believe are “rich”, have a household income that’s between $92,500 to $149,999.

Anyone living in Manhattan, Los Angeles or Miami knows $100,000 to $149,999 ain’t “rich”.

From the Heritage Foundation, Two Americas: One Rich, One Poor? Understanding Income Inequality in the United States

Class warfare has always been a mainstay of liberal politics. Politicians frequently depict the United States as a nation starkly divided between the rich and poor. For example, vice presidential candidate John Edwards decries “two Americas…one privileged, the other burdened…one America that does the work, another that reaps the reward. One America that pays the taxes, another America that gets the tax breaks.”

Obama is no exception – his rhetoric is rich with intent to foster continuation of the  class warfare (envy) in the United States to promote entitlement mentality and dependence on the government; aka socialism.

The “rich” are defined by Obama as those households earning $250,000 or more each year.

We’re told the “rich” don’t pay enough in taxes, they exploit others for their personal gain, and they benefit off the sweat of the lower income earners.

We hear a lot about how Obama will address the needs to “hard working Americans” and provide tax relief to “hard working Americans”; that “hard working Americans” deserve a dignified retirement, incentives to save more money, tax breaks and, the big one, redistribution of the wealth in the country – take from the “rich” to give to the “hard working Americans” who deserve more.

As if the “rich” doesn’t include ANY hard working Americans.

So, I’m going to say it – the rich not only work as hard, or harder for their wealth…but they also work smarter – they work the money they have.

That’s the real rub between those who have and those who don’t.

Simple fact of life:  it isn’t what you earn, it’s what you spend that matters at the end of the day.  If you spend your money on things that are not necessary you will be poor even if you have a high income.

What irks me lately is the government seems intent on destroying the very people who drive our economy – yes, I’m talking small business owners. 

I’m one of them. 

My husband and I own our business and employ 14 people, all whom have families, all whom we feel a great responsibility toward, pay well and provide top-notch benefits to.  Like many other small business employers, we’re being taxed to death!

Last year, I kid you not, even with our deductions, we still paid 50% of our income in taxes – to the federal government, the state, social security, medicare, AMT penalty; I’m not even including sales tax or property tax. 

Now Obama wants more?  Are you kidding me?

How much more can the government take?  How much more can they regulate us?  How long until they drive small business owners completely out of business?

The government seems to think it’s fair to take our hard earned money and re-distribute it to others less fortunate?  Good grief, I can do that by choosing my charities, I don’t need to government to do that for me!

Tax credits – checks of $500-$1000 – going out to people who PAY NO TAXES?  How the hell is that fair?

Another increase in the minimum wage coming this year – to $7.25 an hour, with Obama promoting an increase to $9.50 an hour by 2011….who the hell is going to pay for that 26% pay raise (from the $7.25 an hour) and the social security and medicare match employers have to make?  I don’t get a 26% raise unless I WORK HARDER AND DO MORE TO EARN MORE!

Oh and the one I just love (note sarcasm), the 50% of matching contribution from the government into savings accounts by “hard working Americans” for the first $1000 placed in their accounts through payroll deductions!  We’re “rich” so we wouldn’t qualify, of course.  But tell me – why the hell the government is getting into the business of matching contributions now, anyway?  They’re going to use the taxes they take from me to again, give it to someone else – money I could have used toward my retirement. But they’re not just content with taking my money – they’re only happy when they totally exclude me from even participating in these programs simply because my balance sheet deems me “rich”!

Small business will be crippled by the programs and plans being outlined by the new administration. When this happens, who will be the employers of the future?  Cause it sure as hell isn’t going to be motivated young people – by then, they’ll be fully entrenched in the entitlement mentality and totally dependent on government handouts.