How Will the Biden Tax Plan Affect Your Small Business? Here's what the Biden tax plan would mean to a successful small business owner.

By Tom Wheelwright

Opinions expressed by Entrepreneur contributors are their own.

Chip Somodevilla | Getty Images

Much has been written about Joe Biden's tax plan over the past several months. While Mr. Biden has assured the public that he would only tax "the rich," what would a Biden tax plan mean to a successful small business owner? Let's look at his proposals in the context of a successful small business.

How much do taxes increase under the Biden Plan?

Let's say Mary owns a business that has $1.5M of gross revenue, $400,000 of wages to employees, and net income for the owner of $800,000. Let's assume this small business operates as a sole proprietorship and Mary files her business tax information on Schedule C of her 1040. She also has a little bit of interest and dividend income that is offset by her itemized deductions. What is the consequence of the Biden tax plan on Mary's income taxes?

Impact to deductions

First, let's look at the Qualified Business Income Deduction, or QBID. Under current law, Mary receives a deduction equal to the lessor of 50 percent of the wages she paid out ($400,000 x 50 percent = $200,000) or 20 percent of her net income ($800,000 x 20 percent = $160,000). This reduces her taxable income from $800,000 to $640,000. Under the Biden plan, she would not receive a QBID, so her taxable income would remain at $800,000.

Related: JPMorgan Predicts Stock Market Bump if Trump Wins

On $640,000 of taxable income, Mary would pay income tax of $200,890 (ignoring the deduction for 50 percent of self-employment taxes addressed below and using the 2021 tax rate schedules released by the IRS). Biden proposes raising the tax rates back to the pre-2018 rates which would result in a tax on Mary's $800,000 of taxable income of $272,619 (ignoring the deduction for 50 percent of self-employment taxes addressed below) for an increase of $71,729.

Increased Social Security and Medicare taxes

Under current law, social security taxes will phase out after $142,800 in 2021. This means that Mary would pay $17,993 of social security tax and $28,600 ($5,800 + $22,800) of Medicare tax. Medicare doesn't phase out under the current law and the first $200,000 of income is taxed at 2.9 percent and the rest at 3.8 percent. Under Biden's plan, social security would jump back in at $400,000. This means that instead of the current total social security and Medicare tax bill of $46,593, Mary would now pay an extra 12.6 percent on the amount of her self-employed income above $400,000 or $50,400 for a total of $96,993. Mary would get an income tax deduction for 50 percent of this increase, for a benefit of $9,979 and net increase in tax of $40,421.

Total tax increase

Under the Biden plan, Mary's tax bill will go up $112,150 ($71,729 + $40,421).

Credit: © 2020 WealthAbility®

Credit: WealthAbility

Tom Wheelwright

Entrepreneur Leadership Network® Contributor

CPA, Author and Founder and CEO of WealthAbility

Tom Wheelwright is a leading tax and wealth expert, CPA and author of "Tax-Free Wealth." As the CEO of WealthAbility®, Wheelwright helps entrepreneurs and investors build wealth through practical strategies that permanently reduce taxes.

Editor's Pick

Related Topics

Growing a Business

His 'Mesmerizing' Wintry Product Can Cost Up to $500,000 and Is Used By the Kardashians and Disneyland — But It All Started on Accident

MagicSnow founder Adam Williams had a Christmas-themed show in mind — but a billionaire's attachment to one particular detail would turn it into something much bigger.

Growing a Business

They Barely Had Enough Money to Set Up One Van. Now This Cleaning Company Is a Five-Star Operation With a Loyal Customer Base. Here's Their Secret to Growth.

Bronco Pro Kleen made Entrepreneur magazine and Yelp's America's "Favorite Mom and Pop Shops" list. Hear from the company on how it maintains a high level of service for Denver locals that continuously earns them 5-star reviews.

Living

Shop at Costco for a Year for $60

Here's a great way to save money on office supplies and more.

Business Ideas

Want to Make Money As a Writer? Here's How to Write Things People Really Want to Read

These were the strategies I used to build a healthy newsletter business.

Career

How Stay-at-Home Moms Can Reignite Their Career and Re-enter the Workforce

A returnship is for anyone that took a career break, but this arrangement can be particularly beneficial for busy moms who have taken time off to raise their children and are now ready to jump back into their careers.