SelfInformed

December 2011


Small Tax Tweaks Could Help The Self-Employed

Friday, December 02, 2011

By Kristie L. Arslan

We can all agree that the tax code could be more fair for Americans who want to start their own small business. It’s one of the pillars of the national self-employment initiative that the NASE has been urging policymakers to adopt.

Now President Obama is joining the fight for fair taxes. One of the key components of his American Jobs Act is a further extension of last year’s payroll tax cut for employees. In 2011, the employee FICA contribution stands at 4.2 percent, a cut of 2 percent. The President’s proposal would cut the employee contribution even further to just 3.1 percent. Employers would also see their contribution halved to 3.1 percent.


A Payroll Tax Cut


For the nation’s nearly 22 million self-employed business owners, extending the payroll tax cut to employers is a big deal because they pay both the employee and employer portions of the FICA contribution. The NASE has been arguing that extending the payroll tax cut to employers will decrease overall tax liability for the self-employed in the short-term. The Jobs Act will also help these businesses generate growth for the long-term.

The tax relief will extend to the four different types of business structures that the self-employed have to choose from: sole proprietorship, partnership, corporation and limited liability company. Each business structure pays the same amount in FICA taxes and each has certain advantages and disadvantages that a new entrepreneur must take into consideration. Tax advisor and legal counsel are just two of the hats that self-employed business owners must wear when starting out.

The tax relief included in the American Jobs Act may help some of the current unemployed and underemployed seek out self-employment as a job option. It will also help millions of existing businesses generate economic activity and help our economy return to prosperity.


A Level Playing Field

Let’s face it: Corporations are treated differently than self-employed businesses in the U.S., especially when it comes to taxes.

A corporation is able to write off the amount it pays for its employees’ health insurance, thereby lowering its taxable income. Self-employed business owners, on the other hand, are the only type of business that must pay for health insurance with post-tax dollars. This makes health insurance very expensive for many of the self-employed—costing them money that could otherwise be spent on advertising, phone lines or even hiring additional workers.

A few small changes to the tax code would make a big impact on the nation’s smallest businesses. Many more people may go into business for themselves—keeping them off of the unemployment rolls—if it was easier to do so.


The NASE Can Help

There’s much to think about in terms of tax implications when starting a business, and entrepreneurs won’t necessarily have a CPA or tax lawyer at their disposal to navigate through the many different considerations.

Fortunately, the NASE has resources available for those interested in starting a new small business—resources that can help new business owners navigate the current regulatory landscape to ensure they succeed.


Kristie L. Arslan is president and CEO of the NASE and provides critical insight to policymakers on issues affecting our nation’s self-employed. You can contact her at advocacy@NASE.org.


Read this article in PDF form here.