As a CPA we look at the financials of many small businesses over the course of the year.  One common question we hear is “how come I don’t have more money in the bank?”.   Though the answer can be complicated I like to education my small business owners that over 50% of the revenue they receive goes toward paying taxes.  That’s right over 50%.

How can that be?  Well, let’s explore the numbers.

Before we do that, we are going to use $125,000 as the estimated profit for a small business or the gross income of a W2 employee.  The Federal rate for 2019 for $125 thousand is 24% and Connecticut’s is 5.5%.

A self-employed person’s FICA tax rate for 2019 (January 1 through December 31, 2019) is 15.3% on the first $132,900.

Many of my clients own their own homes.  As you know Connecticut has the fourth highest property tax rate in the country.  For the purposes of analysis, we will use the effective Connecticut real estate rate of 2.07% on a $194,000 home provide by WalletHub, approximately $4,000.  Then $4,000 is 3.2% of our $125,000 base income.

Of course, we all drive a vehicle, most often two and our local municipalities tax those as well.  WalletHub estimated the tax on a $24,000 car in Connecticut to be $632, a rate of 2.59%.  If we have two cars with an average value of $24,000 the we would have a tax bill of $1,264 or 1.01% of our base income.

The table below summarizes our situation nicely.

Self Employed

        24.00 Federal Personal Income Tax
          5.50 CT Personal Income Tax
        15.30 Self Employment Tax (Social Security & Medicare)
          6.35 CT Sales and Use Tax
          3.20 Real Estate Property Tax
          1.01 Vehicle Tax
        55.36 Total

 

W2 Wage Earner

        24.00 Federal Personal Income Tax
          5.50 CT Personal Income Tax
          7.65 Self Employment Tax (Social Security & Medicare)
          6.35 CT Sales and Use Tax
          3.20 Real Estate Property Tax
          1.01 Vehicle Tax
        47.71 Total

 

If you are a small business owner providing professional services, you might have revenues of $150,000.  If your cost is 1/3 of what I charge I have $100,000 profit.  After your tax bite of 55.36% you only have $44,640 in personal disposable income.  So now you know where your money has gone.

I did not include other government charges.  The Department of Motor has a registration and an emissions fee.  A small business has state filing fees and property taxes on their business assets.  At home you might have extra expenses for garbage pickup, pool passes, after school activities and class trips, schoolbooks and more.

This is an analysis.  Many of you will have different incomes, different home and vehicle values.  Others will have some deductions or credits making these tax affects less painful to your checkbook.  You make the adjustments to fit your personal situation.  I just wanted to create a framework for you use in your thinking, so now you know where your money has gone.