For some reason I'm watching Fox News, and Mike Huckabee is speaking with his special guest Joe the Plumber. They are talking about how taxes will impact a small business, how terrible it will be if/when Joe the Plumber buys his own business (Joe's Plumbing?) and has to pay higher taxes on the $200,000 or more his small business will make. Do these guys have a clue about small businesses?
My family owns a hardware store in a NY City suburb, and next year we're celebrating 100 years since the business was incorporated. I've been working in the store since 1973 (with a short break for college), and I now manage the day to day operations of our store. We employ 35 wonderful employees, pay 80% of their healthcare costs, pay money into a pension plan, and pay comfortable salaries to the owner/managers (my dad, my sister, my cousin and my wife all work in the business with me).
So I know a little bit about small business operations and I sincerely hope Joe gets to realize his dream of owning his own small business. However, someone needs to tell Joe the Plumber that his small plumbing business is unlikely to make over $200,000 any time soon. He has ambitions to hire three or four plumbers, and he's worried about his business making $200,000? My business has 35 employees and in our best year the hardware store made $47,000. How is that possible you ask?
I think Joe (and Fox News) is mixing up things like gross sales, net business income, and personal income (i.e. salary). If Joe is running his business correctly, he'll try and keep the business side of the income small, and give himself (and his three plumbers) nice salaries and benefits. Suppose Joe's Plumbing generates $1,000,000 in revenue. Holy cow, Obama is really gonna raise his taxes him, right? Oh wait, Joe needs to pay salaries (including his own), expenses (he's gonna need a pipe wrench and a truck), health care (optional since he's a Republican), and rent for his office. At the end of the year, Joe's Plumbing will be unlikely to declare any income at all and certainly nowhere near $200,000.
Closely held family businesses try their best to keep the business net income to a minimum. It's better to pay yourself a good salary, get a benefit or two (plumbing conventions in Las Vegas), buy some nice equipment, and pay your staff well than it is to wind up with a taxable net income at the end of the year for the business entity. It gets trickier when you have absentee owners who want to see some business income, but Joe doesn't seem to be courting any silent partners, so he can pay himself a nice salary and run the net income of the business to close to zero. In fact, the first few years in business he's likely to declare net losses (sorry Joe, running a small business can be tough).