Where Joe the Plumber Was Wrong

Joe the Plumber vaulted to stardom this past election and planted a seed in the minds of many. But his view on higher taxes and “spread the wealth” isn’t actually correct. You see, Joe saw the taking his hard earned profits as a reason not to buy the business of his dreams. In reality it’s the opposite that is true.

Why was Joe the Plumber wrong about owning a small business?

Let me explain something about small businesses; business owners take home small paychecks. What? You thought the owner was a fat cat with a big fat paycheck, right?
Well, a good employer pays his employees first, pays him/herself second, but only after spending some on investment back into the company.

Most business owners take home small W2 reported income, probably smaller that the janitor (unless they do that task at night too). Why, because W2 income is taxed at high rates and is subject to FICA taxes. The company matches FICA and has other taxes that are driven by payroll. So for every dollar the owner pays himself as W2 income, they pay FICA twice, more than 15%, plus unemployment insurance, workers comp and other taxes. The tax tally can exceed 30%. Ouch!

So why own a business when the pay is so little? Well there is something called “Seller Discretionary Earnings”. Besides W2 reported income, the owner can expense business related items like cars, trips, cell phones, medical insurance, etc. through the business. There are also non cash accounting deductions like depreciation and amortization that lessen the tax burden and shelter income. Then, what ever is left (assuming the business is an “S” Corp or LLC) can be passed through to the owner’s tax return as dividends or profit from businesses, bypassing the more expensive payroll taxes. So, a business owner making $100,000 a year is living a much higher life style or “cash flow” than an employee making $100,000 on a paycheck.

This is the same for Joe the Milkman, Joe the Restaurateur or Joe the Retailer. It’s a common place in most businesses I review daily. I’m working with a local “Joe” on his dream of ownership right now, and if all goes as planned, Joe will be a new business owner before the end of the month.

Believe me, Joe the Plumber needs to own a business if he wants to keep what he earns. Might not be a bad idea for you either!

Dave Roeser is a local business owner, licensed business broker, for profit and non-profit board member and local economic development advisory council member. Dave can be reached at Droeser@sunbeltnetwork.com Additional information can be found at www.sunbeltmidwest.com