How Joe The Plumber makes $250,000+ (Vanity)

Parden the vanity but the complete lack of understanding by the Media and the Obama campaign on how small business owners are taxed is driving me a bit nuts (as a small business owner myself).
You hear all the "There is NO WAY Joe the plumber is ever going to make $250,000 a year!" Or any plumber for that matter...

What people need to understand is that small business owners (small C Corp, S Corp and LLC) are going to be taxed on what they take home in their paycheck AND the money that the company itself makes during the year.

Why does that matter? Because the owner is being taxed this year for money he/she leaves in the company for next year and beyond. So you are taxed for money you never really get yours hands on.

For example. Joe goes into business. Hires 5 plumbers. Pays himself a tidy $125,000 a year (pretty good, and not high enough to trigger Obama's huge new taxes). "See! no problem", they say and that is where everyone stops the analysis. The trick is... The company itself goes on to take in revenue of $600,000/year. Joe's margins are good. Let's say 25%. That means the company is going to clear $150,000 for the year. Joe being a wise business owner in these times wants to keep that $150,000 in the business so he can make payroll come Jan 1 and then plan for expansion in the coming year (hire more people, buy more trucks, train his workers).

But guess what? Joe can't do that. The $150,000 the company nets goes right to his taxable income which is now reported as being $275,000 once it's combines with his take home pay for the year and he has to come up with the 35% (and going up under Obama) even though he doesn't have that other $150,000 in hand.

And oh yeah, the inflated income for Joe also means he is WAY over any threshold for the myriad of tax credits being bandied about, he can forget about that.

So what is Joe going to do? He's going to have to pull a large chuck of profit out of the business to pay his taxes for the year, reducing what he can do in the following year. All of which will be taxed at the highest possible rate. So there goes $50K of the $150K. If joe is smart he's going to keep $50K on the side for payroll/expenses/rainy day, and then if he is lucky he has $50K for expansion. Well maybe because before long he will have to make his quarterly estimated tax payments for next year... The beast has to be pre-paid ya know...

You are exactly correct. A Obama finance guy was on Cavuto the other day and was asked where these 95% tax cuts were coming from?

The reply was it was going to come in the form of a $500 credit out of FICA. They plan to make it up on the top end by removing the caps.

Thing no one is discussing is this will lead to job losses as employers pay 50% of the FICA. This is a huge chunk they pay out each year. IF the cap is removed and they have to pay even more they will make it up by job cuts or going offshore. Then there is the 1099 employees who pay the entire FICA hit... they would see a large chunk go to FICA... all so Obama can use the fund as his personal candy jar to please the poor with tax credits...

This man is no economic genius and more people advising him, like Warren Buffet, think like Joe Biden, it is patriotic to pay higher taxes -- as long as they have all "their" tax loopholes in place....

Pay close attention to this part of post 33:

Joe has most of of the value of the business ends up being "goodwill"

When you incorporate, it's kind of like gifting some of your assets to the corp. It generally owns the lion's share of itself, so you, as the managers have to look out for its interests, not just the interest of the shareholders holding the stock that's been issued (you).

Take extra care when you take bonuses, because the IRS might redefine them to be dividends, taxable to both the corp & you.

By keeping most of the assets in a separate entity, you gain back much of the flexibility you lose with incorporation. Make sure you have all of your lease agreements in your corporate books. If all leases have a one year term, you can reevaluate the rate that the corporation pays every year. The corporation must get a reasonable deal, so you can't drain corporate assets above a fair market rate in your leases. Anything shorter than a year may raise red flags.

Understand, you have to find a balance, because your corp will have more difficulty getting credit if it owns no assets. If you have a good relationship & history with your bank, it shouldn't be a problem, because you'll do most of your borrowing with the sole-prop or partnership. As the owner of the sole-prop or partnership, be careful using the sole-prop's or partnership's assets as collateral for corporate borrowing, because that would pierce the corporate veil.

Also, be careful about lending your corporation anything, because that also pierces the corporate veil & it may be looked upon as "goodwill", like the assets you gave the corporation when you incorporated. Getting the money back will be seen as a taxable event for you.

Thing no one is discussing is this will lead to job losses as employers pay 50% of the FICA.

The employee pays 100% of FICA. The rate employers pay their employees take all government burdens into account. Wage + tax liability + cost of bennies (paid vacations, health insurance, unemployment liability, work comp insurance) = cost of employing someone. Wage rates are adjusted accordingly.

WE are broke as a company each year at the close of our tax year. We pay all money out to the owners. Then we start over. But we have a different kind of business and can do this. We may have 2 owners that are in the 33% bracket. No need to leave that money sitting there and lose 33% for those of us who are well below that leve. The dang tax system in this country is nothing but a scam for politicians to buy votes group by group or class by class. It makes me ill.

Yes I know about all the not-so-hidden additional costs of having employee, but unless that employee is a independent contractor the employer pays 1/2 the FICA... the employee pays one half and the employer pays the second half and the full amount is added to the employees year end W-2.

The FICA base for 2008 is $102,000. The employer and employee each pay their share of the FICA tax of 6.2% or a maximum of $6,324 from the employee and $6,324 from the employer.... and if self-employed you pay the full 12.4%.

I know what it looks like on paper, with the half & half deal. I spent many years calculating it. The employer will add the 6.2% & cost of other employment expenses when considering employee wage rates. Employees pay for all of their bennies, through a reduced pay rate.

If you're self employed, the spouse or minor child of the business owner are exempt from it, least that's how it used to be. Same with Federal unemployment, the tax paid with the 940.

Exactly.... and now the democrats want to hit employees with a mandatory additional 5% administered by SS Administration and basically do away with employer-matching 401k’s... I don’t know why every GOP candidate including McCain is not running with this... so much for Obama saying he won’t increase middle income taxes, they are already working on it and he isn’t even elected.

The dang tax system in this country is nothing but a scam for politicians to buy votes group by group or class by class.

The real danger with the Dem approach is the movement to make the middle class depenent on these tax credit/refunds. They've always had the poor bought and paid for, but that isn't good enough to guaruntee an election.

The day Mr and Mrs Joe Suburban start to budget in these refunds as they way they are going to pay the day care bill we are just screwed as a country.

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