A new report from the nonpartisan Tax Policy Center estimated that 57% of U.S. Households paid no Federal Income Tax in 2021. This was due primarily to unemployment, relief funds, tax credits, and other stimulus payments.
This number was up from 44% in 2020. That’s right. Normally only roughly 40% of our citizens pay income tax to begin with.
But given the pandemic, the number jumped thirteen percentage points last year. The implications, when you think about the deficit and long-term health of our nation, are staggering.
Is it right to participate in a Democracy, having all of the benefits that we enjoy, and not be forced to pay for it? We can get into that argument later, but I bring up the issue to raise yet another.
Many of our clients are having a completely different issue this year. Some are paying more income tax than ever before. And it’s hard. Don’t think I don’t know how hard it is, but there isn’t anything that can be done about it.
Let me explain.
Let’s say that your business normally does a gross of about $1M. It’s an S Corp, so between salary and distributions, you normally pay tax on about $150K.
Your withholding and tax deposits are set up so that when we do the return, we normally come out pretty even. But last year was anything but normal for many.
If we were able to qualify you for the Employee Retention Credit, then your income is going to be much higher this year. If we were able to claim another $100K in ERC’s, then you’re going to pay income tax on $250K rather than $150K.
And there’s nothing we can do about it. Here’s another scenario which I’ve seen more than once this season.
Let’s say that your business normally carries a debt load between payables, current liabilities, and long term liabilities of $500K. But you were able to get both of the PPP Loans.
You paid your people and got the loans forgiven, but you weren’t shut down over the period either. You kept operating your business and given the PPP Loans, were able to pay down your liabilities by half.
What does that do to your tax liability? If your liabilities go down then your taxable income goes up, so guess what? You now have to pay tax on an additional $250K.
Let me leave you with this.
Either way, it’s the best thing that ever happened to you.
If the government gave you a boatload of money on the Employee Retention Credit with no strings attached, how can this be bad? What are you crying about?
Or if you paid down your liabilities by a Quarter of a Million Dollars, good for you. Isn’t that what we’re supposed to be doing as Entrepreneurs?
Now we need to pay some tax. Okay. Let’s man-up and get it done already.
Thank whatever God you pray to that you aren’t the person I mentioned at the beginning of this message that didn’t make enough money to pay any income tax at all. Don’t kid yourselves my Brothers and Sisters.
Making money is a blessing. It beats the alternative.
We’re all going to get through this. Let’s get through it together.
Accounting Solutions Ltd. stands ready to complete our mission and purpose of protecting you, your family, and your business. Whether you need Employee Retention Credits, Payroll Services, or Accounting and Tax Work, you have but to ask. I’m here and I remain,
Chris Amundson
President
Accounting Solutions Ltd.
773-267-7500
www.AccountingSolutionsLtd.com
Note that the only professional services provided by Accounting Solutions Ltd. are those specified in a written communication from our office detailing the scope of services to be rendered and the terms and conditions applicable to the engagement.