It’s that time of year. At least it is for us.
Time to pay my taxes.
As a baby accountant, in the years when my clients would bring their tax information in and I would compile it all and marvel, mouth dropped open, on “how much money they made” I swore to myself that I would NEVER complain about paying taxes when I made that much money.
Well damnit, I’m complaining….just a little.
But maybe complaining isn’t the exact right word. What I really want to do is educate. Because I love to turn the lights on for people. And also, because I’m sick and tired of hearing:
“The Rich Do Not Pay Their Fair Share of Taxes.”
#bullshitalert
I know, I know. It’s what you’ve heard. From your friends. From the media. From Facebook.
So it must be true, right?
#wrong
As the owner of a small business (defined as a business with revenues [that’s revenues…not profit!] of $1 million per year or less), I’d like to walk you through parts of my tax return. So that you can help me in dispelling this terrible myth. This “party line” that only serves to further separate us.
So let’s start with wages. You’ll notice I don’t make any.
That’s because I only earn money if my business makes money. So, I don’t take a wage…I take draws from my business as there is cash available.
I’m going to take a wild ass guess and imagine that your tax return likely has line #7 filled out for wages for you or your spouse. And I’m going to take a guess that, like me, you grumble because that number sure as hell is NOT the amount of cash that you saw go into your bank account, right?
Life and taxes…are a bitch.
Most of the reason that you didn’t see that cash in your bank account is due to two taxes: your income tax and a little thing called social security taxes. In fact, 7.65 percent of your total wage is taken out before you even see that money.
But did you know that your total social security tax due to the federal government is NOT 7.65%?!?!?! That’s correct! Social security due to the federal government on your behalf is actually 15.3 percent! But if you don’t pay the entire amount, then who does?!
Yes, that jerk who employs you does!
So, for the pleasure of employing you, the owner of the company you work for not only has to pay the full wage you see on that W-2 of yours and send in the 7.65% of your wage that is taken out of your paycheck…..they also have to PAY 7.65% in additional tax just for you.
Example: you make a wage of $50,000. $3,825 is taken out for Social Security/Medicare tax of 7.65%. Let’s say your effective tax rate is 10% or $5,000 per year. Your employer expends $50,000 by paying you your wages of $41,175 and remitting the remainder or $8,825 to the government for your taxes. In addition, they pay another $3,825 in Social Security/Medicare tax on your behalf. So, for the pleasure of employing you, their minimum cost is not your $50,000 wage, but it is $53,825!
Right now, my business, is a proverbial small business. We make revenues of less than $1 million dollars per year. (Sounds like a lot, I know…but at the end of the day….it isn’t!). We put three people to work full time and usually have an intern or others who work for us. Last year, the taxes my business paid was: $74,159.
This included the Social Security / Medicare tax I just explained to you, plus here in Washington I pay what’s called a Business and Occupation tax.
Oh yes, this is a tax that I get to pay for the pleasure of doing business in Washington. And it’s a gross receipts tax.
What does that mean? It means that for every dollar that comes in the door, I get to pay Washington 1.5% of my revenues. Make $1,000? I pay them $15. Make $10,000, I pay them $150. Before I ever get to enjoy any of the fruits of our work or deduct any expenses!
It’s super fun! So the $74,159 line item you see above are the taxes I get to pay for the pleasure of being in business and having employees!
But it doesn’t stop there.
I am self-employed. So I have to pay the federal government my own social security taxes at the full rate of 15.3%. This is a super fun one. Remember, I don’t have wages! But it doesn’t matter! For those of us who are self-employed, the IRS made special forms just for us!
This year, my total self-employment tax was: $27,924!!
Don’t worry…we’re still not done.
After all my business income and expenses and taxes paid to various government agencies, my accounting records said I had earned income from my business!
And just like you, because I earned income, I paid more taxes.
This year, we paid:
Yes, $111,,784….you read that right. And believe me, it makes my ass pucker, too. Especially, since we aren’t done yet.
You see, according to the IRS and their infinite wisdom, we didn’t pay enough in tax…so a little thing called the “Alternative Minimum Tax” needed to be calculated. You know, because
Rich People don’t pay their fair share in taxes.
So in addition to the Self Employment Tax and my income tax, we paid $1,088 in AMT, because, well, the government needed to get their fair share!
And NO…we STILL ARE NOT DONE!
Thanks to Obamacare, also known as the “ACA” I evidently did not pay enough medicare tax…you know, because not only did I pay my fair share via the Self Employment tax calculation and also on behalf of my employees…but I now have to pay EXTRA.
So, they tacked this $1,856 on:
If you haven’t kept track, let me help you:
Business Taxes $ 74,159.00
Self-Employment Tax $ 27,924.00
Federal Income Tax $ 111,784.00
Alternative Minimum Tax $ 1,088.00
Additional Medicare Tax $ 1,856.00
Total Taxes – Before State Taxes $ 216,811.00
Let that reality sink in a little.
What could you do with $216,811 in your bank account? And this is no gimmick. This is real cash. Out of my pocket, into the government’s hands. You know…the government that does great things with our tax money!
With that cash..how many more people could I give a job to? What are the raises I could give to the awesome people who work for me now?
And remember, my little business makes less than $1M per year. That’s less than $1 million before I pay employees, pay rent, pay all these taxes…pay our household…
#depressing
My friends, can I tell you something else about being rich?
We don’t get to take the same deductions as everyone else. That’s right. I have two teenage boys at home. They eat us out of house and home. They are expensive!
But see that line item called “Child Tax Credit?”
Yeah…it’s blank. Because you know….rich assholes like us don’t deserve child tax credits, no matter how many kids we have. That’s a $2,000 tax deduction that we don’t get to enjoy.
But it gets better! Itemized deductions…you know for paying a mortgage, giving money to charity, all of that? Yeah….that gets diminished too. This is a fun one!
That’s $4,682 that could have reduced our taxable income that we weren’t allowed to claim because…”we made too much money.”
There you have it. A glimpse into a real “rich person’s” tax return.
Listen, we have an incredible life. And I get it, we live in a nice home, we drive nice vehicles and our kids go to private school. But also know, we shop at Walmart, I walked out of Kohl’s the other day because they wouldn’t give me an $80 discount I should have had on the items I was buying, and we are still as down to earth as two people can get.
And there’s the rub. The majority of people in this USA who are classified as rich are just like us. We are nice people. We work our asses off each day, we give people jobs and go without just to make payroll some days/weeks/months!
So, the next time you hear the premise that “rich people don’t pay their fair share of taxes.” Please remember this primer and please know that we don’t just pay our fair share…we pay more than our fair share.
And just like you, we help make up the backbone of our great and wonderful nation!