Small business owners and changes to the personal income tax rates

What I have here is a question that seems reasonably straightforward to me, but one which I know has a strong potential for generating some discussion and debate. That’s the main reason I’ve put it here, although for my own purposes I’m interested in what the laws currently say, rather than how they should be changed.

One of the common objections to allowing the Bush era tax rates to lapse, for annual household incomes higher than $250K, is that this might adversely affect small business, causing them to reduce hiring/hours, or even to let workers go. But, how exactly is that supposed to happen? Isn’t the tax on business profit supposed to be separate from the income tax imposed on the salary you decide to pay yourself? By the same token, if the business owner takes all the net profit for himself/herself and family, then doesn’t that mean all the remaining revenue of the enterprise goes back into said business, in the form of wages, rent, equipment, and inventory?

What am I missing?

A lot of small business owners or partners file as an S Corp on their taxes. This allows them to pay personal income tax rates instead of corporate tax rates. If they earn more than 250k, they do pay more.

Of course, the S Corp exists so that small business owners can pay less in taxes than corporations. And the amount of people filing as S Corps above 250k is like 2%, and it’s usually investors who don’t have much to say in the way of hiring and firing. Plus, you’re talking about 4% more, so to have to fire an employee over it takes earning a lot more than 250k. And as you said, that’s 250k in profit, not revenue. If they want to hire or fire, they use pre-taxed money. So there’s further dilution. Overall, it will have no effect on national unemployment.

It’s just that even saying the phrase tax increase scares small businesses because they are usually already scraping by. Plus they pay the full amount of social security/medicaid instead of having half of it matched by an employer on the first 100k or so (though even there, anyone filing as an S Corp can divide their income into salary and bonus, with only the salary being subject to payroll taxes. For the rich investor-types, it’s all bonus income.)

My post was kind of bad there…the basic assumption is that an SBO earning 500k would now need to earn 515k to make the same take home. The assumption is that they would cut expenses to meet that threshold.

It wouldn’t affect unemployment any more than it did when Clinton raised taxes, which is to say not at all. There’s not enough people making 250k and filing as S Corps. This, like most tax issues, is about the top earners not losing their small tax breaks that offset their higher income brackets.