One person shop guy complains about payroll tax......

    By erica20 on Fri, 10/05/2012 - 12:46pm |

     

    I'm looking for opinions from my business friends here. I came across a FB thread in which someone alleges that Obama said in the debate that he would raise Small Business taxes (which I can't verify because I haven't yet watched the debate.) Then the guy said:
     
    "As a small business owner myself, I can state that I am getting killed with taxes. Federal, State, City of Seattle, payroll, Medicare, SS, unemployment, and more. The list goes on and on and on. It prohibits me from growing, and more taxes are simply unsustainable."
     
    BUT HERE'S THE KICKER: I looked up this guy's business, and he HAS NO EMPLOYEES!!! He appears to be a one-person consulting firm. 
     
    So here's my question: does a guy who runs a one-person shop get to complain about how payroll and unemployment taxes are preventing him from growing his company??? Because I suspect there might be other things holding him back--like maybe a tendency to blame others for his own inadequacies....
     
    What do others think about this?

    Comments

    Well, one thing that sucks for sole proprietors is that, since they are their own employers, there is no other person or entity to share some of the taxes and fees like payroll, Medicare, unemployment insurance and health insurance while "traditional" employees split these things with their employers.  Basically, as his own boss, he's on both sides of the deal, so he's pay 4.2% to Social Security as well as the 6.2% employer share.  To him, it feels like his Social Security taxes are 10.4% while mine are 4.2%.

    This is a somewhat ridiculous argument, though, as my employer no doubt factored in costs like their part of the payroll tax and took it out of whatever they were willing to offer me to take the job in the first place.  For the traditional employee, the employer's part of payroll taxes, Medicare taxes and insurance premium is a kind of stealth tax.  Most of us don't think about it as something that comes out of our compensation.  And, it's ambiguous.  If my employer were suddenly exempted from its share of the payroll tax, would my wages rise by 6.2%?  Maybe my bosses would pocket half the exemption and I'd get a 3.1% raise.  Maybe I wouldn't get any raise at all and the company would stash away the savings.

    Our self employed complainer deals with none of these ambiguities.  Every dollar out is a dollar out and he knows, since he's the decision-maker, that he can allocate every saved dollar to his own bank account.

    In reality, he has nothing to complain about.  He's taxed just like any other employer/employee partnership, it's just that he sits on both sides of the deal.  That he pays both sides of the payroll tax must strike him as unfair.  But he's really taxed the same way a traditional employee is, it's just his experience that's different.

    To put it another way, I understand why he feels that way but he does not have a legitimate complaint.


    by Michael Maiello on Fri, 10/05/2012 - 1:36pm

    It's also a lot more work for one person to handle all the paperwork and bullshit for all the taxes and rules, but them's the breaks when a sole proprietor chooses to  incorporate instead of just being a plain vanilla Schedule C self-employed. With the latter, you just have to do quarterly estimated, if you do a corporation and payroll, it's a whole 'nother ball game. Lots more checking accounts that you're always at the bank shifting money back and forth, with attendant paperwork, lots more deadlines where you have to come up with  numbers, an acounting, a filing and a check for the government or else, lots of accountant fees, and even with an accountant, inevitably lots more fines. Lots more and fancier write offs, too, but you have to spend time or pay someone to find them and figure them all out.

    You know, a lot of times, I think when you see this kind of anger from a small businessperson, if you dig down deep about what's bothering them, it's not the total amount of money the pay in taxes, it's how much work and time they have to put into paying them, spending lots of time on something they loathe doing, when they would rather put the time into their business. I think what many of them are really screaming is: can someone/anyone puhleez make this easier to do? There is also for many the feeling that they are paying more than required, that the big guys can hire the smarts to pay less and do it all more efficiently with software etc.

    If you take it away from the tax topic and think about say, health insurance, maybe a bit more understandable to those who haven't any experience with this. Who likes to deal with a health insurance company? Well, a small businessperson who has health insurance for himself and his employees is doing that work. And always thinking with every bill increase, change-in-coverage letter, claim, whatever: am I getting ripped off, am I getting a fair shake here? Should I spend more time trying to figure this out if I am supposed to be getting a better deal here, should I pay someone to do it who could also rip me off, or should I just let it go, pay it, accept it, and get back to work? It's all about allocating time, where your time would pay off more, a constant decision about that.

    Edit to add: some local corporate taxes, like in NYC, can add a significant amount of money to the annual tax bill, and an even larger amount of work. As in: if you ignore that special new fire extinguisher inspection excise tax, before you know it, you've got a lien....and when you see those letters from the state sales tax people: immediate attention required!


    by artappraiser on Fri, 10/05/2012 - 2:31pm

    I can speak from some personal experience on this.  I'm not sure you can say his complaint is not legitimate.  Now, certainly we can compare the sole proprietor to the employee and say that compensation for the employee is more than a matter of wages.  The employer shares the burden of taxes and frequently the burden of health insurance and has likely priced this into wages.  So you can then turn to the sole proprietor and say that she must also price these costs into what she charges clients.  All is fair, no?

    Except that from the perspective of the agent, there are now different incentives for choosing traditional employment over sole proprietorship.  Employers share the burden of taxes and insurance not because they're really generous and benevolent, but because they are required to do so by law.  If you go to work for someone else in a W-4 arrangement, you will have a significant portion of your tax burden paid for.  If you go it alone, you'll have to pay it all yourself.

    This is going to affect whether people choose to seek traditional employment or choose to start up businesses of their own.  Specifically, it adds incentive to the former.  While there may be arguments for doing so, I'm not sure that I would call it fair.  The work that I do as an independent contractor is just as good as the work I've done as a traditional employee, but one role gets a break where the other doesn't.  You might say that it comes with the territory.  After all, the benefits are all mine at the end of the day.  While this is true enough, I also take all of the risks.  I don't get paid simply because I show up every day at 9AM.  I have to attract clients, discover their needs, negotiate and fulfill contracts - all before I see dollar one.

    To be clear, I'm not saying that the current arrangement is absolutely right or wrong, but there are already inherent incentives in going to work for someone without reducing their tax burden.  There are also incentives in working for yourself.  While I don't get paid vacations, I can do something that traditional employees can't: take time off when I want to.  Of course, I have to sort out the timing and logistics such that I don't leave any of my clients hanging, but assuming I can do that I have a degree of freedom that traditional employees don't enjoy.  I bring this up in part because you've mentioned often how you'd like for every American to have the opportunity to take time off to pursue their interests.  One possible way to achieve that is to make it less burdensome to work for oneself.


    by DF on Fri, 10/05/2012 - 2:46pm

    Maybe I was too harsh.  I definitely agree with artappraiser that things need to be simplified to save time and money and I agree with you that we'd have a more self-directed society with more ownership and fewer employees.  In the end, though, owners and employees need to be treated equally.  Some people don't want to be in charge, after all.


    by Michael Maiello on Sat, 10/06/2012 - 12:53pm

    Well, on the other hand, nobody forces anyone to incorporate. (Actually, I knew a well-to-do art dealer who switched to being un-incorporated for few years for tax benefits when laws changed, according to his tax lawyer's advice. The tax lawyer said he'd have to get an appraiser to appraise all his inventory to do this, and pay transfer taxes on same,  is why I know.smiley ) But I think the amount of work that your basic Mom and Pop has to do to be a corporation, and the frustrations they inevitably have with government agencies, makes them tend to sympathize with Republican memes, and also to think they are paying too many taxes/too much in taxes. People who have no experience with this should think of what it would be like to be visiting their local Department of Motor Vehicles for something every week (or these days, maybe more like, the local voter's registration office. wink)


    by artappraiser on Sat, 10/06/2012 - 1:24pm

    To address the other side of your comment, Obama did not say during the debates that he would raise Small Business taxes. What he did say was that his definition of small business and Romney's differ, specifically, that he would not include Donald Trump as a small-business owner, or the owner of a NLB baseball team (IIRC). I.e., being a small business owner was as much about revenues as about the number of employees you have.


    by Verified Atheist on Fri, 10/05/2012 - 4:24pm

    I do not think that some portion of the Dem Party really understand the problems of the small small business guy or gal.

    For twenty-five years, I would have to pay the employer's portion of SS & Medicare and unemployment insurance and when I declared my 'profit' I would have to pay twice that amount.

    And I recall being so happy to gross 60 grand after three or four years of catastrophe but the unemployment office would make me pay an additional four grand for someone who quit my employment.

    I would never fight the issue and declare that the person quit.

    I am talking about 1985 dollars; but rents and mortgage percentages were 12%; not four percent.

    There are hundreds of thousands of shopkeepers out there with two or five or seven employees.

    When a repub talks about 'small business' that arsehole is talking about an employer with fifteen hundred employees.

    I think at one time I had twenty employees.

    The problem is that one must gross hundreds and hundreds of thousands of dollars

    in order to net $50,000.

    And in that event, an extra 13% in those days went to SS etc...

    Stilli did a blog on this at Cafe I think years ago.

    Categorization can skew figures just like 'framing the issue' can.

    The repubs never ever ever cared one goddamn about some employer with fifty employees.

    That category has nothing to do with their philosophy.

    the end

     


    by Richard Day on Fri, 10/05/2012 - 6:04pm

    I think you guys have it right--the shock of sole proprietor taxes after being just a regular employee would be significant (most people don't realize that their employers pay some taxes on their behalf.) And the extra paperwork involved in the public company aspect must indeed be daunting.

    But for the guy to blame his bad business decision on the government? And be partisan about it? Coming from an obvious devotee of the "party of personal responsibility," that seems like a pretty crappy level of personal responsibility to me!


    by erica20 on Fri, 10/05/2012 - 8:12pm

    I think the biggest issue is that the voice of small business owners is largely missing from the Democratic debate.

    We do come across as anti-business because we don't articulate at a national level a combined compassionate worker-small business - up to large business arrangement.

    Occupy Wall Street didn't address this, and if we're talking about people who lost regular jobs and had to strike out on their own, or just people trying to build something new, it's a huge problem. 


    by PeraclesPlease on Sat, 10/06/2012 - 9:15am

    Perhaps this small business owner was addressing the issue that the payroll taxes to hire an employee are the budget breaker and therefore renders him unable to afford to expand.  However, if an employee cannot deliver the ability to increase business to cover his/her costs to company, then either your product/services market share is not conducive to expansion and/or your not marketing and/or providing quality product/service.  

    Currently, he/she only has to pay his self-employment and social security taxes for self. 

    If you are self-employed, your Social Security tax rate is 10.4 percent and your Medicare tax is 2.9 percent on those same amounts of earnings but you are able to deduct the employer portion.


    by Aunt Sam on Sat, 10/06/2012 - 1:44pm

    Then state, city & unemployment taxes, plus provisions to maintain the employee.

    You're talking about a typically 60% overhead on an employee. That's not all the fed's doing but worth paying attention.


    by PeraclesPlease on Sat, 10/06/2012 - 1:55pm

    Of course.  We don't have a state income tax so that is off my radar.  But, we do have state unemployment tax, which keeps increasing due to the flagrant abuse that the state enables (that's fodder for another blog methinks.)


    by Aunt Sam on Sat, 10/06/2012 - 3:05pm

    Well that is reasonable but it seems to me in this day and age the guy could easily close the gap with 1099 contractors....unless as you suggest and I suspect, the business model or leadership (or possibly economic conditions) are not in place to allow for expansion.


    by erica20 on Sat, 10/06/2012 - 9:27pm

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