Under Obama’s plan to let the scheduled 2011 tax rate hikes occur, and his plan to raise the self-employment tax on those making more than $250,000.
The S corporation rate would rise from 35 percent to 39.6 percent.
The sole proprietor and partner rate would rise from 37.9 percent all the way up to a staggering 50.3 percent.
Many Democrats in Congress have proposed making all small businesses (including S corporations) pay this 50-plus percent rate. A small business tax rate that high would be the highest marginal rate faced by them in nearly a quarter-century. (source: http://www.politico.com/news/stories/0708/11670.html)
How does that affect the small business owner?
Small firms:
• Represent 99.7 percent of all employer firms. • Employ about half of all private sector employees. • Pay nearly 45 percent of total U.S. private payroll. • Have generated 60 to 80 percent of net new jobs annually over the last decade.
Small businesses employ about half of U.S. workers.
Of 116.3 million non-farm private sector workers in 2005, small firms with fewer than 500 workers employed 58.6 million and large firms employed 57.7 million. Firms with fewer than 20 employees employed 21.3 million. While small firms create 60 to 80 percent of net new jobs, their share of employment remains steady since some firms grow into large firms as they create new jobs. (source: http://www.sba.gov/advo/stats/sbfaq.pdf)
The Sink or Swim Principle
In affect, a small business that generates $1,000,000 in taxable revenue will experience a tax hike of 4.6% or $46,000. If a company of that size employs 10 people that essentially may mean the equivalent of one salary or one job.By definition a small business is one that employs <500 employees. If that is the case, imagine a 444 person company, like the film company Lions Gate Entertainment Corp.(Public, NYSE:LGF. That did 27.48M in Net Income last year. This would amount to $1,264,080 in additional tax. If you ASSUME the below the line employees averaging $50,000 that may result in 25 Jobs Hacked, or 5-6 % of the staff, so the above the line staff can maintain their income levels. Granted this is an assumption based on the sink or swim principle that the strong will survive. In this case the strong being the above the line, check signing executives.
Can you imagine another 5-6% increase in Unemployment and Joblessness?
Small Business owners are typically vigilant, risk taking, hard working, and determined people. This is why they most likely took the chance to start a small business. They are willing to work, and at the sake of maintaining their income levels, they just might sacrifice hourly or salary employees to keep their income levels or more importantly keep the business alive and save the livelihoods of the other employees.
A 4.6% Tax Cut May Incentivize Small Business Owners to Employ People May be a Better Idea.
The above example is for Corporations subject to the 4.6% tax increase and does not address the more radical sole proprietor and partner rate which would rise from 37.9% all the way up to a 50.3% or a 12.4% increase. In the LGF example above that would produce the following result:
27.48M in Net Income last year. This would amount to $3,408,000 in additional tax. If you ASSUME the below the line employees averaging $50,000 that may result in 68 Jobs Hacked, or 15% of the staff. Granted most sole proprietorship's and partnerships do not employ 444 people, but many Law Firms are LLP's or Partnerships, as are many other forms of businesses that are just as subject to tax hikes and similarly lay offs and cutbacks.
