Posted by: Mike P. | September 21, 2010

Joe the Plumber


There seems to be a rather misconceived notion about how taxes and small businesses work.  So, I thought we would look at a prototypical business, and see how and what the taxes are.  I wish this site was a Wiki; then we could all participate.  But, it’s not.  So, what I will try to do is add comments back into the main posting.  In other words, if some assumption I have made is incorrect, or I have forgotten some detail, I will edit the post and add or correct the information.

The goal is attempt to find the truth, not to make any particular point – other than those who actually pay taxes on $250,000 of income, outside of expensive to live areas – are relatively few.

That last statement does bring out a major flaw in the tax code.  I make a reasonable salary, for instance, but if I lived in the Bay area, I would make quite a bit more, be in a higher tax bracket, and so pay quite a bit more federal tax.  Is this fair?  Arguable, I suppose.  A lot of federal money most likely goes into the Bay area.  Rebuilding interstates and the like, for instance.  But, is the difference between Maryland and the Bay area accurate?  Well, I don’t know.

Consider that to earn $250,000/year, you have to be paid approximately $125/hour.  Not too many of us make that.

So, let’s start with Joe the Plumber cause we all know who he is.  Lets make him be an S-corp.  Plumbers are not usually C-corps; I do not know enough about LLC, and sole proprietorship would be short and boring.

Around here, a plumber charges, oh, about $150 an hour tops.  That’s a pretty hefty rate, and is only supported by a guy that has employees, advertises, and does quality, guaranteed work.  We’ll assume Joe actually goes out on the job, has people working with him on some jobs, and pays someone to handle the books.  We’ll assume Joe works 5o hours/week, takes 2 weeks in the summer, and 1 week spread around the rest of the year.  Joe is healthy, and never gets sick.  But, he is not an idiot, and buys health insurance for he, and his family.  Joe has one full-time guy, and gets day labors when needed for larger jobs.  He 1099s the day help because he is honest and does not hire illegals.  He runs his business above-board, and so wants to 1099 the day help so he can write off the expense.

So, what’s the gross income: 49*50*150 = $367,500.

Joe always collects, so we’ll ignore the usual deadbeats.

Joe pays him main guy, who only works 40 hours/week, $20/hr, or about $40,000 year.  So, the costs of this employee are: salary, employer portion of FICA, unemployment, and workman’s comp.  Additionally, remember that Joe offers himself healthcare, so I believe he has to offer it to his employees, too.  At any rate, we’ll assume he does because he is a good guy.  I am going to round FICA at 7.5%, and guess at the remaining numbers.  If you have better guesses, please let me know.  So, total cost for Joe’s guy is:

49*40*20 = $39,200.  FICA = $2,940.  Unemployment?  I really don’t know.  $1,000?  Workman’s comp?  $1,000?  Healthcare?  $5,000?  The guy has to kick in some of the cost, so I’ll stick on the $5,000.  So, total cost is:

$39,200 + $2,940 + $1,000 + $1,000 + $5,000 = $49,140.

On average, they need $10/hour help 20 hours/week.

49*20*10 = $9,800.

Joe pays a bookkeeper to handle payroll taxes and the like.  He also has to pay for his tax returns, someone to file quarterlies, etc.  Again, I’ll have to guess here, too.  If anyone has a better guess, let me know.

Bookkeeper, records, etc: $2,000

Advertising, telephones.  Joe doesn’t need an office – a cell phone works fine.  He’s smart enough to not take a home office deduction because he doesn’t really do anything at home.  If audited, he would probably lose.  Business cell – two phones must be around $100/month.  Advertising has to be at least $200/month.

$100 + $200 * 12 = $3,600.

A truck.  Plumbers have trucks, right?  I am not a CPA, and am not going to read the tax code today.  Let’s make a rough guess.  Joe buys a $25,000 fitted out van.  He pays cash ’cause that how he rolls.  He can depreciate it over five years, most likely.  Maybe less.

$5,000

So, currently, we are sitting at:

367,500 – 49,140 – 9,800 – 2,000 – 3,600 – 5,000 = $297,960

If Joe can’t manage to find additional deductions, he will pay extra taxes on $47,960 (the amount over $250,000) if Obama has his way.

Help Joe find more deductions!  There must be business taxes to pay.  Additionally, there is state and local taxes to pay.  Can we get Joe under the magic $250,000?  I’ll bet we can.  And if we can, then those against the increase in taxes on the small businessman are going to have to explain why?  I mean here, we have a hard-working guy who really is pulling down a large rate.  I don’t know anyone working 50 hours/week year round pulling in $150/hour.  If he doesn’t, he still has to pay his main guy the salary they agreed on, so Joe’s tax rate will be less since he has less income.

Comments?

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