Monday, July 16, 2012

Econ 101

I took macro and micro economics in the summer of 2008, back when I thought I was going to be an accountant when I grew up. After those classes and Accounting 101, I decided that my future was going to take a different path.* But I took those classes and I received A's in them. But they did not actually stick too closely (I purged them as soon as the classes were completed and grades were in!). So I have a couple of questions from those who may know/remember/understand these things better than I.

If I am a small business owner, is it not true that I will be paying taxes on my 'net' income and not my 'gross' income? (Provided of course that I do not ship any of my income to Switzerland or the Cayman Islands and pay taxes on everything that I should).  So if I get a nice little government aided start up loan and rent a building for a boutique, buy inventory, pay the bills, etc all with that start up loan (making the loan payments, of course) and at the end of the first year, after all bills are paid, I have a profit of $75,000 then that is all I have to pay taxes on, right? Am I correct so far?

So in Year 2, business picks up and I need to hire a cashier for the afternoons. $10/hour - 20 hours/week for some future fashionista after school. And my profit is $100K for that year, am I now allowed to take that almost $11K off the top of my profit? Instead of paying taxes on the $100K that I made (after paying rent, untilities, loan payment, merchandisers), is it not correct that I would pay taxes on just over $89K? BECAUSE AN EMPLOYEE IS A TAXABLE DEDUCTION?

Looking at it even closer, that employee is going to cost me more than the $11K in salary, are they not? Medicare and social security matching? Unemployment insurance and Workers Compensation? So wouldn't it be closer to the truth to say that I would be able to deduct maybe $15K for that ONE employee?

So whether my tax rate is 20%, 50%, or 90% I am not paying taxes on the salaries and benefits that my employees are receiving?

I know that this is simplistic and I know that there are other factors and facts involved, but I am trying to ensure that I have an actual grasp on this subject before I make an ass of myself!

And if you stop by and do not leave a comment explaining why I am wrong, my reputation as an ass will be your fault!

*I have great respect for accountants, because they got through all of those boring classes. Of course they would probably shudder at my adoration of classes like "Beauracy - The 4th Branch" also. It takes all kinds.


Mr. Charleston said...

Not all expenses are 100% deductible but employees and employment taxes are, as well as state and local taxes. But you're right, you pay federal income taxes on your net. I wouldn't worry to much about looking like an ass, few people have any kind of grasp on the tax system and there are so many variations that it's nearly impossible to categorize anything as fact. I once knew an accountant whose clients were primarily doctors. He considered his initial tax return as his first offer. If it was rejected, he would simply resubmit it. Most of the time the second submission would be approved. He would make the IRS reject it four times before he reworked it and he rarely had to do that. Approval depended entirely on whose desk it landed on on which day. Of course, today, things are computerized and that plan might not work.

LeftLeaningLady said...

Some of my friends allegedly grasp the tax code although you would not know it by their postings, so I wanted to make certain that I was at least in the ballpark!

Thank you!