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Small Business Owners and Taxes

Crippling Tax
Photo by Douglas Miller/Keystone/Getty Images

There seems to be a common perception that small business owners are laughing all the way to the bank. While business ownership does, in many cases, elevate some people to a higher income than the average worker, the IRS reports that they many not be as well off as many people think.

How Much Do Small Businesses Make?

Those who jump in and take the risk of starting their own businesses, and make a successful go of it do well. According to IRS data small business income accounts for 20% of the Adjusted Gross Income of tax filers with incomes of more than $250,000 but only 3 percent of those making less than $250,000.

Closely held business stock, non-corporate business interests and limited partnerships make up 20 percent of the net worth of all Americans. But those numbers can vary. If the business owner has a net worth of under $1.5 million the assets listed are only 17 percent of their total worth. Those with income over $20 million had almost a third of their worth in those assets.

Business Owners Making Less

In 1993 those with $200,000 incomes 29 percent had business and professional income. Fifty-eight percent had partnership and S-Corporation income. But in 2007 those two figures have fallen to 19 and 42 percent respectively.

While business owners making over $200,000 got 25 percent of their income from their business in 1993 that figure dropped to 21% in 2007.

Tax Payments

In 2008, only 2 percent of tax returns were filed by business owners making over $250,000 per year. Ninety-two percent made less than $250,000. Business owners with incomes of more than $250,000 received almost 70 percent of their income from their business ownership.

While there are fewer wealthy business owners filing tax returns they still account for a disproportionate share of tax burden. In 2008, only 1.4 percent of tax payers had business income and earned more than $250,000 per year. Yet this small number of tax filers produced five percent of the aggregate Adjusted Gross Income.

People always say that wages are stagnant or growing slowly. The same is happening to small businesses. Few small business owners are wealthy but the few that are pick up a significant amount of the tax tab each year.

Some Final Thoughts

People don’t risk everything to start a business with the idea that they are going to rip people off or exploit a bunch of gullible employees who are stupid enough to work for less than they are worth. People start businesses because they see a need that’s not being filled or they think they can satisfy that need in a new or better way.

Suppliers, taxes, fees, licenses, payroll, insurance, electricity, phone, gas, inventory, are all paid first and if there is anything left the business owner might be able to take home a couple of bucks. The small business owner’s always the last in the food chain to be paid, not the first.

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