In this article, I share the pitfalls that many small business owners face: Paying taxes twice and what you can do to avoid this trap.
Let me share the story of Monica…there are lots of business owners just like Monica who start a business and end up paying tax twice.
Monica was a Masseuse. Monica worked hard, she was passionate about what she did, but her net worth didn’t reflect her efforts. Like most business owners Monica went to school. After school, she started working for a Massage company.
She was trained in the different muscle groups and manipulations and she became really at good at doing massage. One day Monica looked in the mirror and she didn’t like what she saw. Here was a woman in her mid 30’s working long hours, taking orders from a boss, who wasn’t all that bad and tired of being told what to do.
Monica had the romantic ideal that she could start her own massage business.
She would be independent, in control and keep 100% of the revenue for herself. What Monica didn’t realize was this thinking was a false perception. Just because Monica understood the doing of the business didn’t mean she understood the business of business.
You can never keep 100% of the revenue because you have to pay the business expenses which is what the company that Monica worked for was doing.
At the time Monica didn’t realize this truth. In any case, Monica went home, she talked to her husband, she talked to the dog. The dog gave her permission and poof she gave hers notice, took her knowledge and skills, opened a bank account, got a business license found a location and started her own Monica’s massage business.
Monica’s romantic ideal quickly ran into the brick wall of reality.
She had no customers, she hadn’t thought about the structure of her business. She was unaware of the legal and financial aspects of business and she was unsure about her goals. To make matters worse, Monica was now working for someone who demanded more hours, more sales, less profit, less family time and 9 jobs instead of one.
For the price of independence and control you sacrifice 14 hour days, 7 days a week, wondering how you got into this mess, you are overworked, overloaded and overwhelmed, you see the dream getting farther and farther away.
To add insult to injury, you can end up with two types of taxes.
I get this question from business owners like Monica all the time: how come I am paying so much in tax and what can I do to stop having to pay so much?
Principle Number 1: Double Taxes
When you are self-employed operating your company as a sole proprietorship you are paying payroll taxes.
That means as an employee of your own business you pay roughly 7.5% on your net income or profit from the business. In addition, your company, the sole proprietorship, also has a responsibility to match the 7.5% and pay it over to the government.
Therefore, you have to pay 15% in payroll or self-employment taxes.
There is nothing you can do to avoid paying this tax. There are no deductions or credits like there is on the income tax side to reduce the self-employment tax.
Principle Number 2: The S Corporation
To avoid the double tax we recommend that at a certain point in time the business owner should consider becoming an S corporation.
The profit of an S corporation is not subject to payroll tax. There are many factors that need to be considered before just going out and setting up an S corporation.
At Business Growth By Design, we have expertise in tax law and can guide and advise you correctly on whether the time is right to become an S corporation, the advantages and disadvantages and if it is right for you.
Are You Taking All of the Deductions Available for Your Business?
Take action by creating a long-range plan for your business that will help you keep more money in your pocket rather than the government’s.
Set up a meeting with one of our tax professionals and discuss ways to position your company for success by giving us a call at (760) 579-0079.
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Unless your situation is very straightforward we are well positioned to find ways that will more than compensate you for the time and cost you spend with us.