|
|
The 43.3% Small Business Tax Rate
Mario Iezzoni, CPA, MBA
Certified Business Analyst, USF/SBDC
Small business owners need to be acutely aware a tax rate of 43.3% actually exists. When it comes to planning and making business decisions this rate can deliver a serious blow to a business owner's dream of success. Even a marginal amount of success may force struggling entrepreneurs to seriously reconsider their effort.
Small business owners are well aware of the long hours required to start and grow their business. At some point their labor will generate profits.
The Internal Revenue Service calls the profits created by the labor of a business owner "earned income." Earned income is taxed in the same manner as the wage an employee receives for their effort in helping make their employer profitable. The tax law requires earned income to be subject to Federal Withholding, Social Security and Medicare taxes.
The first tax, Federal Withholding is calculated based on a set of graduated tax rates. In 2002 the rates range from the lowest at 15% stepping up four times to the highest rate of 38.6%.
The second set of taxes to be assessed on earned income is Social Security and Medicare taxes. Social Security tax is charged at a flat rate of 6.2% with an additional 6.2% paid by the business until the taxpayer's income/profits reach the ceiling of $84,900. The Medicare rate is 1.45% and again requires the business to match the amount. The Social Security and Medicare taxes amount to a collective rate of 15.3%. This rate is called Self-Employment tax and is assessed on the annual profit of small business owners.
Usually, an owner has a spouse who works for another employer to help out with family finances. The spouse may earn enough income to place the couple on the second step of the graduated tax bracket. This step is commonly called the 28% tax bracket. This rate combined with the self-employment tax rate of 15.3% amounts to an overall rate of 43.3%. When a small business owner sits down to evaluate the taxes required to pay, they quickly realize their tax burden is significant.
A tax rate of 43.3% means each year the first 158 days of an owner's effort will go to paying Uncle Sam. June 8th will be the owner's first payday of the year. Payday is extended even farther if the profits are to be reinvested into the business to assure continued growth.
Ultimately, the small business owner should plan for the day they have to pay for their profitability. Planning involves seeking and listening to the advice of professionals such as accountants and financial advisors who routinely work with small business owners. The time, money and effort invested in seeking advice may help make payday come much sooner.
» Mario Iezzoni is a Certified Business Analyst with the University of South Florida’s Small Business Development Center and a columnist for FloridaStartup.com.
|
|
|
