THE TAX ATTIC with Jerry Coon

Penalized for starting a business?

One of the trickier decisions that must be made by those who are in business is deciding how much to spend on marketing. Once the dollar amount is calculated, then comes the even more difficult decision of where exactly to spend those dollars.

Jerry Coon

Print media, such as advertisements in newspapers like The Rockford Squire and The Cedar Springs Post, must get an allotment of dollars. Internet-based marketing, such as maintaining a website, is certainly worthy of a fair amount of the dollars. In today’s marketing environment, yellow pages advertising, including both print and Internet-based search engines, deserve coverage.

In addition, there are other opportunities that come up from time to time that demand participation and the outlay of some of those budgeted dollars. One of those opportunities happens this Saturday. The seventh annual Rockford Community Expo will take place at the Rockford High School from 9 a.m. to 3 p.m. The Expo is a great example of the spirit of cooperation that exists between the Rockford schools, the Chamber of Commerce, and at least 180 area businesses and organizations willing to spend some of their marketing money. No selling takes place on Saturday, just marketing. If everything works out weather-wise, up to 10,000 people will attend the Expo. How much is it worth to have 10,000 people walk past your booth and match up a face with your business name? To me and Action Tax Service, that’s worth every cent of my entry fee. See you on Saturday. Stop in and say hi to us at booth 64.

Action Tax Service has been in business for over 20 years. In each of those years, I have talked to many people who are contemplating starting a business. Some of the things we talk about are how much money it will take to get the business started and running; what are the options to raise that start-up money; how to put a budget together; and determining what type of entity the business should take.

One of the most important items is the last one: the entity options that are available to the start-up business. If there is just one person starting the business, there are four options available. The entity can be a sole proprietorship, a Limited Liability Corporation (LLC), a Sub S Corporation, or a C Corporation. If there are two or more members of the start-up, the choices are still four. The entity can be a partnership, a Limited Liability Partnership (LLP), a Sub S Corporation, or a C Corporation.

There are substantial tax differences between each of these options. One of the most glaring differences is how each type of entity treats self-employment income or Social Security tax. Self-employment income or Social Security tax is payable on the profits of the entity at the tax rate of 15.3%. The owner of the sole proprietorship, the partner, or the LLC or LLP member pays in the 15.3% tax with their income tax return. The IRS then forwards this Social Security tax on to the Social Security Administration (SSA).

Let’s compare how Social Security tax works for employees. Employees have one-half of the Social Security tax, 7.65%, withheld from their pay. The employer of the employee then matches this 7.65% and pays in the whole 15.3% to the Internal Revenue Service. The IRS then forwards the 15.3% on to the SSA. A sole proprietorship, an LLC, a partnership, and an LLP treat all operating profits as subject to self-employment tax. Just a little commentary on our tax system. An employee pays 7.65% Social Security tax on his pay. That employee then leaves to start his own business. He now pays 15.3% Social Security tax on his pay. The distinct penalty he pays for starting a business is 7.65%.

In our economic and political atmosphere where there is so much emphasis of creating jobs, I am amazed this penalty still exists and exists with absolutely no discussion. Why penalize a person for taking a chance and starting a business? There should be an incentive to start a business and not a penalty.

Next week I will discuss how the business person makes the choice of being an LLC, an LLP, a Sub S Corporation, or a C Corporation. Each one carries its own special set of tax rules. This is Jerry Coon signing off.

Jerry Coon is an Enrolled Agent. He owns
Action Tax Service in Rockford. Contact Jerry


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The Squire has been Rockford’s free weekly newspaper since 1871. Our loyal readership includes over fifteen thousand homes in the Rockford area, including the affluent Lakes area of Lake Bella Vista, Bostwick Lake and Silver Lake; Belmont, Blythefield, as well as Algoma, Courtland, Cannon and Plainfield Townships. The Squire is distributed through the U.S. Post Office every Thursday. We also deliver to in-town businesses and homes with paper carriers and news stands in our grocery stores and over thirty local shops.