Economy "No taxes on Social Security, Overtime and tips" just passed

[gentel]

Eliminating taxes on tips is just dumb - best case scenario it's just privileging one category of income above others unfairly for no reason. Worst case scenario it could be exploited as a major loophole, say by having an accountant get 90% of their 6-figure income as tips or something like that

 

[randomg1t]

Every single democrat voted "fuck your overtime, fuck your tips fuck your social security" while spamming X and other social media sites with how Trump is going to take away social security.

you do understand medicare and medicaid is getting gutted, right?

there's a 4.5 trillion tax cut coming, and you ain't the recipient.

but it's the democrats that hate the working man, lol.

 

[KeepingItReal]

And yet we routinely see folks not report income (hello small businesses with lots of cash spending, and those who get tips), stretch and abuse write offs, etc.

And you act like claiming tips means setting your hourly wages at 7 bucks lol. Did they not teach you about the numbers between 7 and infinity?

If people aren't willing to shift their compensation into lower-taxed forms, then why do finance bros dream of working in jobs where they get carried interest?

I worked for a business like that. One thing I noticed about it, is that it wasn't doing well. They couldn't find people to hire. When things aren't above board, employees notice and if they have any sense they leave.

The reason I picked $7/hour is because the IRS can create a rule that says anyone who can't potentially qualify for a tip credit can't have tip income.

I don't know why you're asking me this question, as I don't know any "finance bros." As for the topic of why people have lame dreams, dreams that are just an exaggeration of what someone else has already done, I wish I could tell you.

 

[avenue94]

I worked for a business like that. One thing I noticed about it, is that it wasn't doing well. They couldn't find people to hire. When things aren't above board, employees notice and if they have any sense they leave.

And yet it is extremely routine for small businesses and waiters to evade taxes. Clearly successful businesses and employees do it too, not just shady ones that no one wants to work with or for.

The reason I picked $7/hour is because the IRS can create a rule that says anyone who can't potentially qualify for a tip credit can't have tip income.

They could, but I wouldn't count on it until the ink dries. And there'd still be loopholes to exploit.

I don't know why you're asking me this question, as I don't know any "finance bros." As for the topic of why people have lame dreams, dreams that are just an exaggeration of what someone else has already done, I wish I could tell you.

I'm asking you because carried is not gurranteed, it's effectively a commission. But people who have the option to receive it almost always jump a the chance to shift comp away from wages to that, because of the lower tax rate. It's the same trend you'll see if tips are exempt from taxes.

 

[nixkid]

Lot of detail required to address that.

First, LLC's aren't a federal thing. They're a state level entity that provides legal liability protection. Federal tax law completely ignores them. So a single member LLC at the federal tax level is just...you. And you can't be an employee of yourself. Federal tax law does cover partnerships but that's for all business entities that involve more than one person engaged in some kind of business venture. And the entire purpose is about how to allocate the profits/losses for tax purposes. And the partners can't be employees of themselves because the partnership itself is not a legal entity but the money it creates still has to be taxed properly. This is all in Subchapter K.

However there are 2 actual legal entities that the tax code does address, Subchapter C and Subchapter S entities. They are legal fictions -- meaning that they are legal entities that exist separately from the owners/creators. And these are handled differently from LLCs and partnership because they issue ownership shares. Because C and S entities are legal entities under the tax code, separate from the founders who are just shareholders, they have employees. And there are no rules that prevent shareholders from also being employees. Hence why many companies like to provide stock options and ownership shares to highly valued employees.

Swinging to overtime and exempt vs. non-exempt status. Everyone who works for a Subchapter C or S entity is entitled to overtime and minimum wage protections. The corporate entity has to voluntarily seek exemption. That means when someone takes salaried job, their company has to get permission to avoid paying overtime. The employee has to opt out of OT and MW and FSLA protections, otherwise they are applicable.

Back to LLCs, remember when I said that they don't exist in the federal tax code and are only state level? Every person who forms an LLC in their state gets to choose how the federal government views their LLC and thus how it is taxed.

Pass through taxation:

Spoiler

Why would people choose C/S corp. vs. LLC? The tax issue of "pass through taxation". Because LLCs are non-existent under the tax code, any income they generate goes straight to the member and they pay taxes based on their personal tax rate. In a C/S corp, which is a legal entity of it's own, the C/S corp pays taxes based on it's income. The "owners" don't get that money, it belongs to the corporation. So, a person can own a C corp that makes millions of dollars but never get a penny from the company (unless the company issues dividends). So the owners don't pay taxes on the corporation's income.

Double Taxation:

Spoiler

The other issue is that the C Corp first pays taxes on its revenue. Then it has to pay employment taxes on the wages it pays to employees. Then the employees pay taxes on their wages. The same money gets taxed multiple times (there are deductions to help with this to an extent).

Tax Differential.

Spoiler

For many small business owners, their personal income tax rate is lower than the corporate rate, especially with creative deductions, so they don't want the corporation to pay a corporate tax rate on money that they could pay a lower rate on if it passed through the LLC instead. And if the corporation is paying them enough money to exceed the corporate tax rate, they're going to have to pay the higher rate anyway on their personal returns.

So, for single member LLCs, the cost of treating their businesses as standalone legal entities, C/S corps, doesn't necessarily provide any tax benefit while increasing the amount of rules they have to keep track of.

FINALLY THE POINT:

However there is no rule that requires entrepreneurs to form their businesses as LLCs for tax purposes. The IRS very much allows single member C corps. And a single member C corps, as separate legal entities, can hire owners.

And since companies must elect exemption status for their employees, otherwise they are bound by FSLA rules, the company simply chooses to not make that employee exempt.

HANDFUL OF DETAILS:

Spoiler

1) Employers must prove independent contractor status otherwise the worker is classified as an employee.

2) Employers from choose to treat employees as exempt from OT and then prove that the exemption is warranted. Otherwise OT is the the law.

The end result is the law treats all workers as OT entitled employees until the employer requests that the law shouldn't. So any line of reasoning that starts with the premise that the worker will have to establish their entitlement to OT is pretty much the opposite of how it works. The employer has to opt out of OT, not opt in.

I know it was long.

A lot of tech workers are contractors and many of them setup S Corps, employ themselves then pay themselves a "reasonable salary" (that's way lower than their hourly rate), pay income tax on salary and distribute the rest as dividends that are taxed at the lower capital gains rate.

I wonder how tax free OT would impact that? I imagine they would start increasing their salaries and trying to shift more of it into OT. No tax is better than the capital gains tax rate. Plus, trying to low ball a "reasonable salary" was always a sketchy balancing act of maximizing tax benefits vs drawing scrutiny from the IRS. Increasing your salary without increasing the tax burden seems like an obvious thing to do.

 

[KeepingItReal]

And yet it is extremely routine for small businesses and waiters to evade taxes. Clearly successful businesses and employees do it too, not just shady ones that no one wants to work with or for.

They could, but I wouldn't count on it until the ink dries. And there'd still be loopholes to exploit.

I'm asking you because carried is not gurranteed, it's effectively a commission. But people who have the option to receive it almost always jump a the chance to shift comp away from wages to that, because of the lower tax rate. It's the same trend you'll see if tips are exempt from taxes.

True, the thing might not even reach the presidents desk, or by the time it does it might be changed a bunch. I don't see it happening the way it is right now, because they have very little they can cut.