The United States Tax Code remains as one of the most complicated legal doctrines in the history of the States, in spite of widespread calls for simplification.
And while politicians have sought to sway the average American voter with promises of lower marginal tax brackets, the American small business owner remains one of the hardest hit.
This happens, by and large, because a lot SMBs are established as either LLCs or a form of partnership; they can be a lot easier to manage. LLCs default to Partnership tax status, which puts the onus of income on the individual rather than the company.
Generally, when a person takes income through their W2 the company that’s paying them – the employer – will pay a significant portion of the social security and income tax. Not so with Partnership taxation: because all income flows through to the “owners”, aka the partners, they’re left with the entire burden themselves.
That burden is passed on by way of the “Self Employment Tax” – and it can be around 15% of all income, pre-deduction, and no margins are applied to it.
Awkwardly, this is something that’s easily remedied – though it hasn’t ever been addressed. Waiving the self-employment tax for anyone earning less than, say, $50,000 would squarely put small business owners – people who are already fighting an uphill battle – in a much better position, tax wise.
Because little changes like this could so easily alter the landscapes of – and lives of – small business owners, we have to wonder if the politicians re-writing the tax code understand it – and understand the pains of the normal person. Something as small as this could offset the increases in insurance costs we’ve all seen under Obamacare, not to mention the landscape of business funding – as it would free up more capital for business growth and the hiring of more people.
Fundist