I wrote a few weeks ago that W2 employees have no real opportunity to adjust how they pay their taxes- or what they owe. That benefit really only accrues to those who own their own business.
These solopreneurs and entrepreneurs have a very important fact in common- one that W2 employees lack.
A W-2 employee makes his money via salary or payroll. His/her income is clearly delineated on Form W-2. There are no business expenses they can deduct.
Soloprenuers and entrepreneurs, who must keep good financial records, can determine what business expenses can be deducted from their income. And, it’s fairly difficult for the IRS (Internal Revenue Service) to audit them. And, the IRS knows that these closely-held businesses are the prime drivers of the tax gap- the difference between the income taxes that should be collected and those that are actually provided to the US Treasury. (11 million of the highest-income business owners are responsible for at least 30% of the tax gap- about $ 200 million a year!)
The IRS has been working hard to narrow this gap. That’s why credit card companies are now required to provide 1099-K forms- a detailed account of all bank deposits made from credit card transactions of each business. That makes it harder for solopreneurs and entrepreneurs to “forget” to include all their income on their tax returns.
Also, business owners get to determine what portion of their income should be paid via salary and what will be acquired as a dividend. Funds that are attributed to dividends are not subject to employer taxes- which reduces the funds the businessperson obtains by 15%. (The IRS does have programs to ensure that each businessperson is paid a reasonable compensation; it that is not the case, the IRS can rule that all net proceeds of the firm is taxable as payroll for the business owners.)
But, there are other expenses the business person can claim- legal expenses, family member compensation, among other items. Some business folks don’t declare their personal use of business property, which (illegally) shelters income from the IRS.
Which is why the IRS is pushing to have all banks transmit bank account data to the IRS that can then be reconciled with a business’ tax returns. That will go a long way to correcting the tax gap. But, even the IRS knows that this only makes sense for those folks whose firms generate at least $ 25K of gross revenue. (This would exempt 70% of the businesses in the US.) Not because those that generate less income don’t cheat- but because the collections that will come from IRS investigations will be fairly low.
Let’s see what changes this election will bring.
As a small business owner this was an interesting post!
Glad I kept you engaged, Cindy Rae!
Paying taxes is a patriotic duty! Best to pay our taxes, and that includes the wealthy!!
Interesting approach. That would mean that TheDonald is unpatriotic.
the election-potential tax changes that would affect me, as a small business sole proprietor, will likely be so much less significant (even to me) than to the giant corporations who have found write-offs and loopholes to exploit legally, thanks to the current way businesses do business & politics.
I do not think the anticipated changes will affect the “true” small business, Kathleen.
Great observation. I too will be looking out to what changes this upcoming election brings..
Pam Langord recently posted..Sizzling Programs You Can Create In An Afternoon
Thank you so much, Pam. 10 days…
The credit card thing makes sense. If you keep everything separate, and all your business transactions and spending happen on one card, you could conceivably print everything out from the year before and hand that to your tax person, right?
That- and your business checking account. Yup!
My husband deals with this since he has been making money through his business for a long time. it is hard to read about the IRS though because you are right, they don’t go after the big fish as much. That’s annoying!
Dominique Walton Brooks recently posted..Life Reset: Meditation and Mindfulness
It certainly needs to be fairer, Dominique.
Companies who use your expertise are so fortunate!
One would hope so, Martha!
Interesting. But do elections really bring significant tax changes?I wonder!
They will this time- no matter who wins, Dr. A.
Good blog! I truly love how it is simple on my eyes and the data are well written. I’m wondering how I could be notified when a new post has been made. I have subscribed to your feed which must do the trick! Have a great day!
You did it right, Sandya! Thanks for subscribing.