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Why Start a Home-based Business?

October 9th, 2007 at 05:19 pm

Here's something to think about when it comes to the idea of starting a small business or not: Corporations pay approximately 6% to the federal government in tax, but W-2 employees on average are paying 39%.

The government encourages the creation of small business because the more businesses there are, the more W-2 employees that will need to be hired to help run those businesses, and the more W-2 employees the more tax the government can collect.

The government wants new businesses because it's banking on more people being afraid to become a 6% paying corporation than working for someone else in a "secure" situation and forking over 39%. The more businesses, the more W-2 employees, the more money coming in. Who's winning here?

4 Responses to “Why Start a Home-based Business?”

  1. Joan.of.the.Arch Says:

    Were you intending to say something about home based businesses as opposed to businesses located elsewhere?

  2. Broken Arrow Says:

    Hehe. I'm assuming that this is a carry-over from the previous conversation, so I'll pick up here.

    Now, I hope I don't seem like I'm picking on you. It's certainly not the way I like to conduct myself on this website. It's just that you have some very intriguing ideas, and naturally, it gets me asking questions.

    First of all, can you explain why W-2 employees pay as much as 39%? As far as I know, the current tax bracket for those making more than 170k each year is at 35%. It's still pretty high, but to be fair, it also represents the highest tax bracket, and not everyone earns that much. Also, portions of your income will be taxed at a lower income bracket before it moves up to the highest, so even those who are in the 35% bracket are not technically taxed at the full 35%.

    And while corporations may indeed pay very low rates, I think the original conversation dealt with home businesses? In which case, can you really pay as low as 6%? I had a home business once as well, albeit a failed one Big Grin, but I was never able to itemize things that far down. I guess my deduction-fu wasn't quite up to snuff.

    This is sort of a carry-over from the previous conversation, but I think it's worth noting that retirement funds also enjoy such deductions as well. Namely, it automatically "writes-off" as much as 15k per year! Compared with home businesses anyway, I think it's fairly competitive. It's certainly enough to push me down to a lower bracket. Smile

    Finally, I don't remember how all this conversation started, but I think comparing the benefits of retirement funds versus businesses are an apple vs. orange affair. Truth is, you can have your cake and eat it too. Smile I am certainly all for having both. There are retirement funds that are available for people who are self employed. SEP-IRA and Keogh are two terms that comes to mind....

  3. Broken Arrow Says:

    Oh, forgot one tib-bit. It's true that retirement funds are taxed, but they are also one-time, whereas salaries and businesses are taxed annually. So, while they all get taxed in the end, most likely, one will still pay a lot less from retirement funds than they ever will with a business.

  4. Aleta Says:

    I think it depends on what kind of business you're talking about and the type of corporation that you have. There is the C-Corporation and there's the S-Corp. The S-Corps net profits gets passed down as distributions to the share holders which could be only one employee of the company which is also the President, board of directors, shareholders, and officer. The distributions are treated and taxed like any other distributions.

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