Interesting facts about "small businesses"

[Puppycow]

We often hear politicians and pundits refer to "small businesses." But do you know the actual definition of a small business, and what kinds of small businesses exist? The following blog article surprised me:

Yes, You Can Be a Billionaire and a Small Business—at the Same Time!

Fact #1:

Even the Small Business Administration, which exists in part to advocate on behalf of "small businesses," acknowledges that about 80 percent of so-called small businesses in America have zero employees.

80% of small businesses do not employ anyone at all. These are "companies that exist only on paper as a way to pass income from one entity to another."

Fact #2:

In 2007, according to Internal Revenue Service data (see Table 1, Page 4), of the 400 tax returns showing the largest adjusted gross income, a little more than half reported making money through S corporations and partnerships, the category that also includes many small businesses. On average, these high-fliers reported earning more than $83 million in this type of income—which, of course, makes them much, much larger than what most people think of when they think of a "small business."

So next time you hear a claim like raising marginal taxes on income over $250,000 will hurt "small businesses," remember that this what they are talking about, not Mom & Pop grocery stores or plumbers like Joe the Plumber (he never actually made anywhere near $250,000/year) or even the owner of the small business he intended to buy.

 

[Dave Rogers]

Fact #1:

80% of small businesses do not employ anyone at all. These are "companies that exist only on paper as a way to pass income from one entity to another."

That's actually misquote #1. I have, at one point, registered myself as a small business that employed no-one at all; this was not "as a way to pass income from one entity to another", but rather as a means to pay the correct amount of tax as a self-employed person. The article is clear that there are two distinct kinds of business with no employees, which between the two comprise 80% of businesses; you're suggesting that all are the second kind, which is not supported by the source.

So next time you hear a claim like raising marginal taxes on income over $250,000 will hurt "small businesses," remember that this what they are talking about, not Mom & Pop grocery stores or plumbers like Joe the Plumber (he never actually made anywhere near $250,000/year) or even the owner of the small business he intended to buy.

And this is misquote #2. There are 202 individuals identified who use small businesses as a means of tax avoidance. The problem very clearly pointed out in the article, and obscured by your commentary, is that "small businesses" includes both groups - both the super-rich and Joe the Plumber - and hence isn't a useful distinction. It's not saying, as you're trying to imply, that small businessmen are mostly billionaires.

Dave

 

[Puppycow]

That's actually misquote #1. I have, at one point, registered myself as a small business that employed no-one at all; this was not "as a way to pass income from one entity to another", but rather as a means to pay the correct amount of tax as a self-employed person. The article is clear that there are two distinct kinds of business with no employees, which between the two comprise 80% of businesses; you're suggesting that all are the second kind, which is not supported by the source.

Wouldn't the kind you're talking about (a single self-employed person) be a business with one employee? (The word "self-employed" implies that the person is an employee of him/herself). Perhaps I misinterpreted this though.

And this is misquote #2. There are 202 individuals identified who use small businesses as a means of tax avoidance. The problem very clearly pointed out in the article, and obscured by your commentary, is that "small businesses" includes both groups - both the super-rich and Joe the Plumber - and hence isn't a useful distinction. It's not saying, as you're trying to imply, that small businessmen are mostly billionaires.

Dave

That's not what I said or tried to imply. I meant that it includes these people and that only a very small percentage of actual small businesses make over $250,000 but it is possible to super-rich and still be a "small business" And republicans (usually) like to conflate these people with actual middle-class mom & pop operations.

 

[Dave Rogers]

Wouldn't the kind you're talking about (a single self-employed person) be a business with one employee? (The word "self-employed" implies that the person is an employee of him/herself). Perhaps I misinterpreted this though.

It's probably defined differently here than in the US, but as far as I understand it a person in the US can register as a business; they are not therefore an employee, but the owner of the business i.e. the employer. That's what I took the statistics to mean.

That's not what I said or tried to imply. I meant that it includes these people and that only a very small percentage of actual small businesses make over $250,000 but it is possible to super-rich and still be a "small business" And republicans (usually) like to conflate these people with actual middle-class mom & pop operations.

Put that way, I agree with you; there are clearly some super-rich small businesses. However, the problem seems to be not just that Republicans are conflating the two; it's that the statistics are generated such that there's no way of separating them.

Dave

 

[quixotecoyote]

It's probably defined differently here than in the US, but as far as I understand it a person in the US can register as a business; they are not therefore an employee, but the owner of the business i.e. the employer. That's what I took the statistics to mean.

I believe that you can own a business without counting as an employee, so long as you don't actually pay yourself anything with company funds, which makes me think the OP's interpretation is accurate.

 

[Dave Rogers]

I believe that you can own a business without counting as an employee, so long as you don't actually pay yourself anything with company funds, which makes me think the OP's interpretation is accurate.

If so, my apologies.

Dave

 

[drkitten]

80% of small businesses do not employ anyone at all. These are "companies that exist only on paper as a way to pass income from one entity to another."

Yeah, that's a misquote. In context, the quotation is :

Most entities in this country that are categorized as small businesses don't look anything like the icons. A large portion are simply freelancers; when real companies lay people off, many workers become "small businesses." Another chunk are companies that exist only on paper as a way to pass income from one entity to another. Even the Small Business Administration, which exists in part to advocate on behalf of "small businesses," acknowledges that about 80 percent of so-called small businesses in America have zero employees.

Of course, the reason for that is that, under US law, the owner of a business is rarely an employee of a small business as well, because that has negative tax consequences. The owner simply takes the money he needs out in profits, which avoids having to pay payroll taxes for himself.

Most small businesses are structured simply to provide liability protection for the owner. If I'm selling tuna fish sandwiches out of a truck, you can be damn sure that I'd do it as "Tuna Sandwiches by drkitten, LLP" precisely because I don't want to be sued personally if someone gets salmonella. So my tuna, bread and mayonnaise are owned by the company, and probably so is the truck (so that expenses are deductable), but my house, my car, my bank account, and my collection of valuable Fender guitars are all owned by me so the courts can't touch them.

So next time you hear a claim like raising marginal taxes on income over $250,000 will hurt "small businesses," remember that this what they are talking about, not Mom & Pop grocery stores or plumbers like Joe the Plumber (he never actually made anywhere near $250,000/year) or even the owner of the small business he intended to buy.

I'm not sure where you got this, either. But it's not merely wrong, but irrelevant.

If Mom and Pop are running a grocery store or Joe is running a plumbing shop, the "income" the business generates (and is taxed on) is net of expenses.

The building, the supplies, the salaries paid to the employees, et cetera... are all taken out in before taxes are assessed. If he makes $2,000,000 but pays out $1,950,000 in expenses, his "income" is only $50,000.

If Joe's income from his business is $250,000 or more, this means that he himself personally is taking $250,000 in net profits out of his business. In which case, he's simply not going to be hurt that badly by another $7500 in taxes.

 

[drkitten]

I believe that you can own a business without counting as an employee, so long as you don't actually pay yourself anything with company funds, which makes me think the OP's interpretation is accurate.

Well, if you own and work for an S corporation, you are an employee. But if you own and work for an LLP, for example, then you're not an employee, but a "partner." And if you own and work for a sole proprietorship, you're not an employee, but an "idiot." -- but again, you can pay yourself as much as you like out of the profits.

 

[Newtons Bit]

We often hear politicians and pundits refer to "small businesses." But do you know the actual definition of a small business, and what kinds of small businesses exist? The following blog article surprised me:

Yes, You Can Be a Billionaire and a Small Business—at the Same Time!

Fact #1:


80% of small businesses do not employ anyone at all. These are "companies that exist only on paper as a way to pass income from one entity to another."

Fact #2:


So next time you hear a claim like raising marginal taxes on income over $250,000 will hurt "small businesses," remember that this what they are talking about, not Mom & Pop grocery stores or plumbers like Joe the Plumber (he never actually made anywhere near $250,000/year) or even the owner of the small business he intended to buy.

I work for a small business.

It will hurt me. And I've already taken a 5% paycut.

 

[drkitten]

I work for a small business.

It will hurt me. And I've already taken a 5% paycut.

Yes, it's hurt you because your employers proactively cut your pay to meet an obligation that has not been imposed upon them and may never be imposed.

You can hardly blame the Fed because your employers are lying cheeseweasels.

 

[NewtonTrino]

You guys already know my opinion on raising taxes but I make over 250k so it directly takes money out of my pocket and sends it to washington. Also in my state they are also trying to add another tax of 5-9% on income over 200k.

BTW if everything goes as planned I should be creating approximately 25 new high paying (current median salary 105k) jobs over the next year. I *am* the kind of person that creates growth and I live in a low tax state for a reason. If the tax burden in the US continues to increase we are going to actively start trying to shelter some of our money. Our business is worldwide so there isn't any particular reason to bring money back to the US at all in many cases.

 

[Marcus]

Wouldn't the kind you're talking about (a single self-employed person) be a business with one employee? (The word "self-employed" implies that the person is an employee of him/herself). Perhaps I misinterpreted this though.

No. I have a business with 0 employees, I am the sole proprietor, which is treated differently than an employee. Once you start hiring people, you have a whole host of employee related issues to deal with, I've tried it before and it's a hassle. Now if only I could make more than 250k.

 

[Puppycow]

I work for a small business.

It will hurt me. And I've already taken a 5% paycut.

So you get paid over $250,000/year before taxes?

 

[Puppycow]

Of course, the reason for that is that, under US law, the owner of a business is rarely an employee of a small business as well, because that has negative tax consequences. The owner simply takes the money he needs out in profits, which avoids having to pay payroll taxes for himself.

Are you saying that these people do not pay into the social security system?

I'm not sure where you got this, either. But it's not merely wrong, but irrelevant.

What's wrong about it? What you wrote is actually irrelevant to what I wrote. I know that it is net of expenses and I didn't suggest otherwise.

 

[drkitten]

Are you saying that these people do not pay into the social security system?

You pay SS taxes only on "wages," not on dividends or profit distributions. (Actually, self-employed people don't pay FICA taxes at all, but they do pay self-employment tax. Although nominally self-employment taxes are the same percentage as FICA, in practice they're usually lower because the basis is smaller -- 15.3% of $50,000 is more than 15.3% of $30,000.) And that's at the Federal level; state rules often charge payrolls more than self-employment.

 

[Marcus]

You pay SS taxes only on "wages," not on dividends or profit distributions. (Actually, self-employed people don't pay FICA taxes at all, but they do pay self-employment tax. Although nominally self-employment taxes are the same percentage as FICA, in practice they're usually lower because the basis is smaller -- 15.3% of $50,000 is more than 15.3% of $30,000.) And that's at the Federal level; state rules often charge payrolls more than self-employment.

We pay self-employment tax on net profit, which is not a lower basis than an employed persons salary, they don't have the expenses that we've deducted to get to net profit.

And of course your employer pays half of that 15.3%, but that's really part of the salary, it's just a good way to hide it so you don't realize how much tax you are paying.

 

[drkitten]

We pay self-employment tax on net profit, which is not a lower basis than an employed persons salary, they don't have the expenses that we've deducted to get to net profit.

Um.... Actually, much of the time they do, but they don't get to deduct them. "Unreimbursed business expenses" are only deductable up to 2% of your AGI; they're fully deductable to the business.

A simple example of how it becomes a lower tax basis. If your small business buys a car for the business but "requires" you as the owner to use it for personal business (50% time, say) as well, then the pro-rated value [and costs] of the car is, legally, "income" to you. It's "income," but not "wages," and not subject to SEP (or FICA) and the entire cost of the car is still deductable to the business as a business expense. So are its operating costs.

By contrast, if you paid yourself enough in wages to buy a personal car and use it for business, you'd pay self-employment tax on the wages. You could deduct 50% of the operating costs of the car, but this deduction would be capped at 2% of your AGI.

And of course your employer pays half of that 15.3%, but that's really part of the salary, it's just a good way to hide it so you don't realize how much tax you are paying.

Yeah, there's a thread elsewhere on this forum where someone is trying to prove how little he knows about accountancy, business, and tax law by making exactly this claim.

 

[pgwenthold]

Most small businesses are structured simply to provide liability protection for the owner. If I'm selling tuna fish sandwiches out of a truck, you can be damn sure that I'd do it as "Tuna Sandwiches by drkitten, LLP" precisely because I don't want to be sued personally if someone gets salmonella. So my tuna, bread and mayonnaise are owned by the company, and probably so is the truck (so that expenses are deductable), but my house, my car, my bank account, and my collection of valuable Fender guitars are all owned by me so the courts can't touch them.

That's exactly what my wife has done. When she got fired from her vet clinic, she started working as a "relief veterinarian," where she goes around and fills in at clinics who are short handed.

There are quite a few people who do this, and it is basically like a being a substitute teacher.

However, the way we did it was to set up her own company (an LLC), and so basically she works as an independent contractor. That means that everything business related is deducted straight off the top. We even have a Board of Directors, and we have a Board meeting once a year.

The vet clinics she works for know that the costs are treated under contractor services. We even pay the clinics a small fee for "equipment rental" because she doesn't use her own.

Too many relief vets just do it ad hoc, and work their hours and get the paycheck, and sort it out from their. We send the clinic an invoice for services.

 

[Marcus]

Um.... Actually, much of the time they do, but they don't get to deduct them. "Unreimbursed business expenses" are only deductable up to 2% of your AGI; they're fully deductable to the business.

A simple example of how it becomes a lower tax basis. If your small business buys a car for the business but "requires" you as the owner to use it for personal business (50% time, say) as well, then the pro-rated value [and costs] of the car is, legally, "income" to you. It's "income," but not "wages," and not subject to SEP (or FICA) and the entire cost of the car is still deductable to the business as a business expense. So are its operating costs.

By contrast, if you paid yourself enough in wages to buy a personal car and use it for business, you'd pay self-employment tax on the wages. You could deduct 50% of the operating costs of the car, but this deduction would be capped at 2% of your AGI.

As a sole proprietor, I don't pay myself any wages, any money I have for personal use is net profit. I get mileage for business use of my car.

Yeah, there's a thread elsewhere on this forum where someone is trying to prove how little he knows about accountancy, business, and tax law by making exactly this claim.

I'm not trying to compete with you, you can save the smugness for someone who cares. I haven't had a "regular" job for 32 years, I seem to remember my employer paying 1/2 of SS, if I'm wrong, fine.

The only expertise I'm claiming is at being a sole proprietor, not at accountancy, business, or tax law.

 

[Newtons Bit]

Yes, it's hurt you because your employers proactively cut your pay to meet an obligation that has not been imposed upon them and may never be imposed.

You can hardly blame the Fed because your employers are lying cheeseweasels.

...

You have a serious reading comprehension problem. And quite frankly, I'm insulted that you called my employers lying cheeseweasels. They (the three senior partners) are far better men than you. My pay was cut because my profession is already suffering. Adding an additional tax will just make it worse.