Press Conference on Lower Tax Rates (Photo credit: MDGovpics)
Obamacare Means Your Marginal Tax Rate Is Going Up!
On January 1, 2014, the country’s producers will step into a shiny new relationship with their federal government. If you hire, work and produce taxable income, the Affordable Health Care program will force you to pay full price for health care, while creating generous discounts for practically everyone else.
Advocates of redistribution continue to try to perpetuate the myth that, as long as tax rates are less than 100%, business operates as usual because receiving even 1% of your compensation is better than getting no compensation at all. This makes absolutely no sense to anybody but the people collecting your tax money and the people getting your tax money.
As the government levies greater employment taxes on businesses, collects more taxes from families with high income, and provides subsidies to families with low income, there will be a reduction in the incentive to work. The harder you work, the more you pay out in taxes and the less you retain for you and your family.
Even if full government confiscation were the only way that taxes could depress the labor market, raising the average tax rate to 50% and above involves millions of people with rates far higher. Folks that promote Obamacare and generally bigger government have not yet acknowledged that redistribution absolutely requires an increase in the marginal tax rate and contracts the labor market. Here is a great article by Casy Mulligan of the Wall Street Journal that quantifies some of this.
Many small businesses seem to be structured as an LLC or an S Corporation. What is the difference on how these two types of entities are taxed?
All businesses are taxed on their net profit (or loss) which is computed by taking sales less allowable deductible expenses. An LLC’s tax is paid on the owner’s individual tax return based on percentage of ownership in the company. If you are a 50% owner of an LLC, with $120,000 of net profit, you pay tax on 50% of that net profit ($60,000) on your personal tax return.
An S Corporation pays a reasonable salary to the working owner of a business. Then any remaining profit or loss (after subtracting the salary to the owner as a deductible expense) flows through to the owner’s personal tax return. Say you are a working 50% owner of a profitable business and you are paid $50,000 in salary. The corporation has $20,000 of net profit of which you are entitled to 50%; therefore, on your personal tax return you would pay tax on the salary of $50,000 plus $10,000 profit which equals $60,000 in total taxable business income.
Contact us for a free consultation by phone: (213) 223-2269 or visit us at www.firstchoiceadvocacygroup.com. We’re located in the US Bank building downtown Los Angeles. 633 West 5th Street, 26th Street, Los Angeles, CA 90071.
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