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Which Tax System Are You Using, The Rich Person's or the Wage Slave's?

Most people do not realize that we have two tax systems in the United States. One for rich people and another for wage earners.

As a former tax practitioner with my own tax practice, I prepared individual, sole proprietor, "S" corporation and corporate tax returns for over ten years. As a small business owner myself, it was easy to recognize the differences in the two systems.

For purposes of this article, I consider the "rich" person to be a business owner who files federal income taxes as either a sole proprietor, "S" corporation, or as a corporation.

I consider people who are employees, either white or blue collar, wage slaves because their income comes from trading hours for wages. Their wages are tied to their W-2 forms which reports their income to the Internal Revenue Service.

Why do I say there are two tax systems? Simple. Depending on whether you are a business owner (rich person) or wage slave (employee) determines how your income tax is calculated.

If you are a wage earner, you pay taxes based on the amount of your income and you have taxes withheld from your paycheck. The government makes sure they get their cut of your earnings. You get to spend what is left after the government takes their share.

Business income tax is calculated differently. The government does not tax the business on the amount of income (revenue) a business generates. Based on the tax laws, the business gets to offset the income with expenses. From an accounting point of view, these expenses are the costs associated with creating that income.

Here is the really cool part. The amount of tax a business pays is based on the amount left over after deducting the expenses from the income.

Here is an example.

Wage Slave income is $50,000.
Wage Slave taxes are $25,000.
Left over amount is $25,000.

Rich People (business income) $50,000.
Rich People (business costs) $25,000.
Left over amount to be taxed $25,000.

Since the business tax rate is not 100%, business will pay less than $25,000 in taxes. Rich people win since they end up with more to spend. They could spend $50,000 (twice the amount of the Wage Slave) and pay $0 in taxes.

How cool is that? Or to put it in another way. Who would you rather be, a rich person or wage slave?

Next time I will post about business expenses, or why rich people have all the really neat stuff.

For more business related information, please visit my blog at http://www.bizlinkblog.com

 


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