The "fiscal cliff" negotiations center on the potential effect on job creation if the tax rate for personal incomes over $250,000 would increase (by about 2 percent). As someone who operates a small business and reports business income on Schedule C of my personal federal tax return, I am confused about the arguments against increasing the tax rate on top earners. Do folks who claim that raising the rate would hurt job creation actually know how Schedule C works?
It's basic math: (Business sales income) minus (business expenses) equal (net business income). Increase your expenses, such as hiring a new employee, and you'll reduce your taxable business income. This net business income then goes on the 1040 along with wages, interest and dividend income to figure total personal income. Lastly, apply the standard deduction for dependents to determine taxable income.
If my family business was so successful as to make over $250,000 (after expenses) in a year, first, I'd be absolutely thrilled. Second, the whole reason to make this kind of money is to improve my quality of life, and as a small business owner, I would hire more people to help me so I could work less hours, spend more time with my family, take a vacation, and put my business on a strong, stable footing. My quality of life would go up, my tax liability would go down, and more people would have jobs. It's a win, win, win.