Subscribe to FeedIt’s THAT Time of Year, Again! Tax Time!
Thanks to Rashida Simmons for permission to use this Photo.
OK, I know what you are all thinking! It’s spring; the daffodils are blooming; the cherry trees are in full blossom; the birds are singing their happy springtime songs; the sweaters have been packed away; love is in the air; so, what is the problem? Why would someone begrudgingly say, “It’s THAT time of year, again?” What could possibly be the problem with spring?
April 15th is upon us and this is a date which strikes fear into the fiercest of hearts! It is a time when the good citizens of our country must file their income tax returns. “The National Bureau of Economic Research has concluded that the combined federal, state, and local government average marginal tax rate for most workers to be about 40% of income” (Wikipedia, 2008). According to Brigham and Houston (2000), that figure could reach about 50% for some taxpayers (p. 61). What does this mean for all of us? It means that a large portion of your total earnings are due in the form of tax payments. In other words, you must work from January through April or May to pay your tax debt.
Those of you who have been working for several years understand this concept more than some who have not yet held a job or filed their first income tax return. For the entrepreneur, this concept takes on an additional meaning. Not only will you have to file income tax returns for your own personal income, but you will also be responsible for filing corporate tax returns. This is the reason why folks, who are about to start their own small business, need the services of a qualified tax accountant.
If the thought of deciphering tax laws makes you a little crazy, do not worry! According to Eugene Brigham and Joel Houston (2000), authors of Fundamentals of Financial Management, “Taxes are so complicated that university law schools offer master’s degrees in taxation to lawyers, many of whom are also CPAs” (p. 61). The good news? We don’t have to know all of the tax laws to own and operate our own businesses and to be successful; we just have to hire the right CPA.
As an entrepreneur, you should be aware of the following taxes: Payroll taxes, Corporate, State, Local, Government, Income, Sales, and Property taxes. To emphasize the importance of understanding the objectives of taxation, let’s take a closer look at just one form: payroll taxes.
Payroll taxes include Social Security and Medicare tax. Employees are required to pay taxes on all wages and salaries from their place of employment; however, individuals must also pay taxes on investment income and on profits which are generated by proprietorships or partnerships. The Social Security tax, listed as FICA on your paycheck stub, is a 6.2% tax of the income generated by the employee and matched by the employer. How does this affect the small business owner? You actually have to pay double tax on your earned income to the tune of 12.4% because you are the employee AND the employer. One piece of good news, this tax is not applicable to income which has not been earned (i.e., income from interest, dividends, or royalties).Entrepreneurs should also be aware of the Medicare tax. The purpose of this tax is to provide money for health insurance programs established for people who are elderly and disabled. This works the same way as the FICA tax because the 1.45% of the employee’s income is matched by the employer. In other words, you will have to shell out 2.90% of your income for Medicare tax. If you add the tax liability for your total payroll taxes which include Social Security tax and Medicare tax, you can expect this part of your bill to consume 15.30% of your total income. Entrepreneurs should also be aware of other payroll taxes involved. For example, a small tax is assessed to support unemployment insurance. The Center on Budget and Policy Priorities states that “three-fourths of U.S. taxpayers pay more in payroll taxes than they do in income taxes” (Wikipedia, 2008).
This article isn’t long enough to include everything entrepreneurs need to know about taxes; for example, we have only discussed payroll taxes. Corporate taxes are another issue which deserves attention. If you would like to surf the internet regarding The Federal Income Tax System, I suggest that you visit www.taxsites.com/federal.html. You’ll find a wealth of information regarding recent tax legislation and current information regarding corporate and individual tax rates.
Trust me, I do not claim to be a tax accountant and numbers are truly not my forte; however, I do understand this – when employees are complaining about their tax bill, I know that my own tax bill will be double because I am an employee AND the employer! Whewwww! See what I mean? It’s THAT time of year again. Now, if you will excuse me, I have an appointment with my CPA.
Penny Joyner Waddell
Small Business Management Instructor
Ashworth University
References
Brigham, E. F. & Houston, J. F. (2000). Fundamentals of Financial Management. 3rd ed.
Australia: South-Western Thomson Learning.
“Taxation in the United States.” (2008). Wikipedia Foundation, Inc. Retrieved March 12, 2008 from <http://en.wikipedia.org/wiki/Taxation_in_the_United_States>.
“Tax Topics.” (2008). TAXSites.com: Tax, Accounting, and Payroll Sites Directory. Retrieved March 12, 2008 from < www.taxsites.com/federal.html>.
