What's Wrong With This Picture?

1. 0

   JaxsonRaineposted 11 years ago

   When are we going to fix this problem?
   
   Let's say you are married with two kids. You make $50k a year.
   
   At the end of the year, (assuming you didn't have any taxes withheld), you will get a nice ~$3,000 refund check from the government. PARTY TIME!
   
   Let's say you get tired of the grind, so you start your own business. You make $50k in profit.
   
   At the end of the year, you will get a nice, ~$3,000 bill from the government.
   
   Can you tell what is wrong with this picture?

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   1. 70

      rhamsonposted 11 years agoin reply to this

      Really! It is quite simple The tax code favors those that start and maintain families. That is and always will be the cornerstone of society. If you don't want a family and be taxed equally and where the family is ordered to be small move to China.

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      1. 0

         JaxsonRaineposted 11 years agoin reply to this

         Uh...
         
         I think you missed the point. Both situations are married with two kids.

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2. 77

   Mighty Momposted 11 years ago

   If you made $50K and didn't have any taxes withheld, how are you entitled to a $3K refund? Wouldn't the refund be if you had taxes overwithheld?
   
   And if you make $50K in profit in your own business, why do you owe $3K? Where do deductions figure into this equation?

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   1. 0

      JaxsonRaineposted 11 years agoin reply to this

      No... it doesn't matter how much you have withheld from taxes. Your grand total will be that you earned $53,000 that year, because the child tax credit and earned income credit eliminate all of your tax liability, and give you a refund.
      
      To be fair, it's late, and I didn't word that quite right.
      
      In that situation, if you file your withholdings correctly, you will have OASDI withheld, but no federal income taxes, from your paychecks. If, in that situation, your takehome is $50,000, then at the end of the year you will get a $3000 refund.
      
      But, for your business, you have to pay OASDI twice, on top of your normal taxes. Those self-employment taxes would be just over $6,000, which makes the difference between a $3k refund and a $3k bill.
      
      I guess a better comparison would have you grossing $50k, and after all taxes, you break even. Being self-employed though, you pay that $3k extra that your employer would have paid, so the difference if you look at gross pay is only $3k.
      
      Still messed up though, you shouldn't have to pay more taxes as a small business.

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3. 77

   Mighty Momposted 11 years ago

   I think I know where you're going with this, and yes. There should not be a tax penalty for owning your own business. Entrepreneurship should be rewarded and encouraged.
   
   But it's sort of an apples to oranges comparison.
   If you are working for a company, the employment taxes are being paid by your employer.
   They are gonna get their piece of the business' hide whether the business is a corporation or a sole proprietorship.
   When you work for someone else, that is invisible to you.
   You're paying your taxes as an individual.
   But when you open your own business, you are the company now.
   
   Still and all, you should be able to take the same personal deductions.
   AND some business write offs, too.
   There are ways to legally reduce tax liability -- not just for the big guys!
   I would be happy to give you the name of my accountant.
   But you're right. It's way too late at night to be trying to do math.
   I'm signing off for the night!
   Have a good one, Jaxson. TTYL.
   MM

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   1. 68

      Cody Hodge5posted 11 years agoin reply to this

      Yea, its one of the downfalls of being a self-employed person. it also isn't fun that even revenue share you make from old articles is still considered business income.
      
      Jaxson, my advice to you would be to classify your business as a s-corporation. You can designate a portion of your income as a distribution of business profits. That means it is only taxed as regular income and avoids FICA taxes for that portion of your income.
      
      Personally, I think it should be optional as to whether or not you have to pay SS and Medicare taxes. Working for yourself certainly opens your eyes to how much is withheld from us by the government each year.

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      1. 61

         American Viewposted 11 years agoin reply to this

         Cody,
         
         Just want to point out to you the change starting January on sub chapter s corporation. The "stock" the company holds is not on the stock market and in reality holds no value. For some reason, in order to incorporate their has to be stocks and a share holder. Normally in this instance the small business person holds the stock in their name. Under the new law, if your net profit for your sub chapter s business is $50,000, you pay tax on that. In addition, the stock will be valued at the net profit of the company and you will have to pay tax on that as well. based on the portion of stock owned and shared by holders. There are also changes to the SS tax. 
         
         Long and short of the matter is it is a small business tax increase.
         
         http://thomas.loc.gov/cgi-bin/bdquery/z?d112:s.02343:

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