Get All Access for $5/mo

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 Edited by Dan Bova

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.

Want to be an Entrepreneur Leadership Network contributor? Apply now to join.

Editor's Pick

Business News

'You Own Nothing Here on Social': Meta Outage, Looming TikTok Ban Has Creators Questioning How Much of Their Business They Really Control

With repeated tech outages and a possible TikTok ban on the horizon, creators are looking for new ways to influence. Turns out, one old-school way still reigns supreme.

Side Hustle

At Age 15, He Used Facebook Marketplace to Start a Side Hustle — Then It Became Something Much Bigger: 'Raised Over $1.6 Million'

Dylan Zajac, now a 21-year-old senior at Babson College, wanted to bridge the digital divide.

Franchise

How Franchising Can Alleviate Entrepreneurial Imposter Syndrome

The franchise model can alleviate entrepreneurial imposter syndrome and provide an alternative path towards professional independence.

Living

70% of Small Business Owners Experience Monthly Burnout. Follow These 3 Rules to Avoid the Same Fate.

Here are three guidelines to help entrepreneurs achieve balance, growth and success in both their professional and personal endeavors.

Business Ideas

63 Small Business Ideas to Start in 2024

We put together a list of the best, most profitable small business ideas for entrepreneurs to pursue in 2024.