Why/how does the tax increase proposed hurt small biz?

It hit me today as I watched a news program that many people don't understand why this tax increase targeting the 250k income range is such a big deal to small businesses, or how it will effect job creation.

So why do I know? I owned and operated a large staffing agency, in two states, with income ranging from 8 to 16 million a year. I reinvested in growth every year and gave lots of people a chance to make great income. I wanted everyone to have opportunity and to feel they were doing well with us. We were all over Texas and in Nashville. I also got to consult with and see inside small and large companies in all industries. Dell Computer did 5 million a year with us but I also had the little Joe Moe's small shot as well that we did business with.

So here is why the 250k mark is a sensitive one for small business.

Most small businesses are S corporations. What that means is that the owners have to claim the companies income on their taxes. It breaks down like this:

–Your salary — your personal taxes — just like the employees

–Year end — any income the company makes the owner has to claim AS YOUR SALARY and pay personal taxes on it

So — lets say you paid yourself 60k for the year and the company finally made a profit of 100k. You as the S corporation owner must pay taxes on the 160k even if you left that 100k in the company. So let's say that puts you at a 40% tax break. You have 60k left for the company. If its 30% the you have 70K left for the company.

If you earned 60k and the company nets 250k the you pay taxes on 310k. At 40% then that is a pretty big number right? That's 124k.

Now why does that effect job creation or stability for the company? That small business is just like you. That business must have money in the bank to ensure they can pay salaries if the business hits a bump — maybe a large client leaves, or gas prices increase the price of some product, or whatever the case may be. Or Lord forbid they have a horrible insurance claim ( I had a few devastating ones when I owned my biz ) and insurance goes way up. So to ensure they have that cash in the bank, they cannot afford to hire staff, or grow the business. They have to sit on the money.

Now, that owner could prepay expenses to avoid the taxes, or rush to open an office to eat up the money and keep it in the biz and not in the hands or IRS — but then what happens if that cash is not in the bank and that biz hits a bump in the road and it needs that prepaid money to pay employees.

So in other words — that business that finally makes a profit (most don't for YEARS) — can't afford to use that money they have left to grow their business, to add employees, and so on. Nor do they dare use the money themselves! They are forced to sit on it. That's why that 250k number is a low threshold that impacts small business.

Census data shows that only 51% of the new businesses established in 2000 survived 5 or more years. That was in 2000 – before the economy went to crap.

According to SBA.GOV small firms:

Represent 99.7 percent of all employer firms.

Employ just over half of all private sector employees.

Pay 44 percent of total U.S. private payroll.

Have generated 64 percent of net new jobs over the past 15 years.

Create more than half of the nonfarm private gross domestic product (GDP).

Hire 40 percent of high tech workers (such as scientists, engineers, and computer programmers).

Are 52 percent home-based and 2 percent franchises.

Made up 97.3 percent of all identified exporters and produced 30.2 percent of the known export value in FY 2007.

Produce 13 times more patents per employee than large patenting firms; these patents are twice as likely as large firm patents to be among the one percent most cited.

So — the 250k mark is being screamed about because of the impact on small business. Sure — there are those just making lots of money who don't want to give it away, that are screaming. But inside that issue, is the small business issue — and it has to be taken into consideration.

The answer can't be to generically tax that income group — the S corp situation has to be taken into consideration or it will impact small business job creation.

So there you have it. The 250k tax number impacts small biz, jobs, the economy. These are not rich people sitting on big wads of cash and I think lots of people think so.

I remember the year we made 16 million GROSS. And employee said — WOW — you must be filthy rich. Actually NO. That year we had gone from 8 million in sales to 16 million and it was the hardest year of my life. We couldn't get staff trained fast enough, the workload was intense, and we had to open so many offices. That growth was low margin and profits were low. We netted a negative figure that year. NEGATIVE. NET income not GROSS is what counts. Had I not reinvested we would not have kept those clients. Heck if I'd slept that year we wouldn't have kept those clients.

I saw SO many businesses that seems HUGE and successful that were making pennies and struggling to survive. Look at BORDERS. Size does not make profit.

So that's why I worry about this tax thing. Not because I am protecting the big deep pockets. Because I'm worried about those people who are struggling to provide jobs for people and to make a better life — to strive for the dream which is the American way.