If you can delineate how a sub S tax files a return would be instructive.
As an employee I get a W2 and it states my gross income. But income to me is what I earned
If a sub S states gross revenue and subtracts labor, overhead and materials, then there is an adjusted gross. Then the remaining is owner’s equity. If his taxes are based on gross revenue, as opposed to the owner’s equity there is a serious problem with the tax law.
I’m surmising here and don’t really know how this works. Am I correct in my assumption?
A thirty thousand foot view, a subchapter s is how most small businesses incorporate. It provides some legal protections as a corporation, but the taxes are looked at as income tax. For example, you owned Ouderkirk’s coffee shop and register it as a subchapter s. All your gross income, before payroll, would be reported as personal income, even if 99% went right back into the business. If you had payroll employees versus contract employees, you could deduct their pay prior to net, but expenses such as FICA tax liability comes out of your net after payroll.
So, let’s say your coffee shop grosses $300,000 per year. You have two employees earning $25k each, so your net after payroll is $250,000. You report the $250,000 as personal income. But, you still have to pay things like rent, electricity, FICA on your payroll employees, etc. You may have a final personal net income of only $40k.
Now, imagine if Obama only looks at your gross of $250k and raises your taxes by $15k per year. Your other expenses don’t change, so, you either will take a lower personal net income of $25k per year, or, you would fire one of your employees.