Submitted by Commercial-Pair-3593 t3_10phqbp in personalfinance
Commercial-Pair-3593 OP t1_j6l91is wrote
Reply to comment by shadow_chance in LLC and W2 earnings an income tax question. by Commercial-Pair-3593
It was just a generic example, I am in 22% bracket. Thanks for the info, I wasn't able to find anything solid on this matter. Other commenters helped too. It's a bummer that my business is punished because of what I make working for someone else.
shadow_chance t1_j6la100 wrote
You're not being punished. This is actually very fair within the context of the US tax system. If you make 50K at your W2 job and 50K from your business, you pay the same income taxes I pay making 100K at my W2.
Commercial-Pair-3593 OP t1_j6lb5y5 wrote
Depends on how you look at it. If I am competing with businesses making less than $44,725 then they pay 12% tax while I am paying 22-24%. They get an advantage as a result.
shadow_chance t1_j6lblrl wrote
You still end up with more money though. If you quit your W2 job, you'll be in the same position as them.
You also know how tax brackets work right? You only pay that bracket's % on income in the bracket. You don't pay 22% on everything.
Commercial-Pair-3593 OP t1_j6lcivh wrote
Sure but it means I have to charge more to make the same profit as them.
I understand how it works, taking on a side job means that it effectively starts being taxed at 22%.
shadow_chance t1_j6ld2kd wrote
I don't really get that perspective but if it works for you...
RandallDC t1_j6lbs7h wrote
Wouldn’t money being reinvested into the business be deductible? I am not sure your scenario holds water.
Commercial-Pair-3593 OP t1_j6ldj4s wrote
Because of what I make working 9-5, the tax rate on my business income starts at 22%. Yes there are deductibles but it's a level playing field with competing businesses in that regard. Also, I'm still unclear about purchasing equipment in future years but there is a limit to how much you can write off for start up costs. For example, if I spent 50k on tools and equipment and such to start up, I can only deduct 5k the 1st year. I have to continue writing it off in chunks over the next handful of years.
RandallDC t1_j6llljz wrote
Fair. But conversely, you could take earnings from your W2 (which your competition doesn't have) and spend that money on your business to give you an advantage, couldn't you?
Commercial-Pair-3593 OP t1_j6lps6c wrote
So make myself get paid less in my career to essentially pay for part of every person's product so I can reduce prices and be able to compete on price with other businesses? Doesn't really make sense. It took 10 years to go to college and get started in my career.
My career and my business are separate but I am taxed as if they are not which hurts my business. That's my point.
PM_Georgia_Okeefe t1_j6nh9pz wrote
How is your business "being punished"?
Commercial-Pair-3593 OP t1_j6ns084 wrote
Let's say we have 2 identical businesses which have net income of 50k after self employment tax and deductions.
A is the only employment for the owner and B is owned by someone in the 22% tax bracket based off their day job. B will pay almost 12k in income tax while A pays about 6k.
A is more incentivized to start and run a business. A can be more price competitive with their products.
Let's say it takes 5k sales to net 50k profit before income tax ($10 per sale). Business B needs to do 800 more sales to make the same money as business A. And remember these are identical businesses so business B is also doing more work, 800 sales worth more, 13.7% more. So business B has an hourly pay rate that much less than business A.
PM_Georgia_Okeefe t1_j6nvu5k wrote
Yes, but you know what A doesn't have: a day job they can go back to.
You're trying to have your cake and eat it, too.
Commercial-Pair-3593 OP t1_j6p7uhv wrote
They could get a job. They had the same ability as me to do so. Take out some student loans, get experience, get an internship for more experience. Take shit entry level jobs. Change majors losing credits and taking 7 years to graduate. Work retail for 6 years while going to school.
The problem is that the business playing field is not equal. So because they have lese skills they get paid more? Can't you see how that doesn't really make sense? Maybe I can quit my job in the future but 48k after taxes ain't enough.
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