In a previous post entitled, “The Government Encourages Small Business Owners To Fire Employees” I discussed how my friend Zach let go of one of his employees to make room to pay for potentially $30,000-$40,000 more in taxes in 2011 and beyond. As you all know, the government won’t be squeezing small business owners anymore thanks to the tax compromise signed by the President on Friday Dec 17, 2010.
The tax compromise adds some $850-$900 billion to the Federal deficit over 10 years, which is a big problem if the economy and therefore revenue collection doesn’t pick up during this time. Our children will pay for our excesses and that just doesn’t seem fair. But what about Zach’s state of mind and his fired employee who is paying the price now?
I grabbed a quick beer with Zach last night and asked him how pumped he was that he no longer has to budget for increased tax expenses going forward? “A little bit, but not so much“, Zach replied. What a downer, I thought to myself as I believe a tax compromise is good for all Americans.
“You see Sam, although I won’t have to pay out tens of thousands more in taxes for the next couple years, I’m still not sure whether I can grow revenue enough to maintain my current cost base and reach the profitability goals I have. I give it to the Republicans for getting us 2 years of tax reprieve, but what about in 2013? Then what? Are my taxes going to rocket starting in 2013 to make up for no tax increases in 2011, 2012? I’m worried they will! As a result, I’m still very wary of expanding any time soon.”
“How about the employee you let go in August? Was that the right move?” I ask inquisitively.
“Well, it’s too bad I had to let him go, but frankly, even if I knew taxes weren’t going up for another couple years before making the decision, I probably still would have let him go sooner or later because of the impermanence of the tax agreement. We need a permanent tax policy where we all have as much visibility as possible. I’d rather stay as lean as possible until revenue really starts accelerating. Better to be short a little manpower and just work longer, than have too much manpower, you know what I mean?”
“True. It’s kind of like you looking like a creepy flasher in your trench coat to stay warm and dry, rather than look normal and have cold nuts, right?” I retorted.
“Exactly! Now who’s that fine lady over there?”
MAKES SENSE TO ME
Zach is one of the many small business owners who employ 90%+ of the American work force. His arguments make sense as to why a permanent tax policy is so important. If you know your taxes will go up in three years, you’ll probably err on the side of caution and save your money to pay for future tax hikes. But, if you could see for endless miles down a deserted road with no cops in site, you’d open up your Ferrari to the max and take some risks!
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Tax Savings Recommendation
Start A Business: A business is one of the best ways to shield your income from more taxes. You can either incorporate as an LLC, S-Corp, or simply be a Sole Proprietor (no incorporating necessary, just be a consultant and file a schedule C). Every business person can start a Self-Employed 401k where you can contribute up to $54,000 ($18,000 from you and ~20% of operating profits). All your business-related expenses are tax deductible as well. Simply launch your own website like this one in under 30 minutes to legitimize your business. Here’s my step-by-step guide to starting your own website.
Updated for 2017 and beyond. Income taxes are set to come down under President Trump. As a result, those who contributed to their Roth IRA or Roth 401k and planned on retiring in 2017 – 2021 had wrong tax expectations.