Reading Between the Lines of the 2011 Budget Proposal – What’s NOT on the Agenda for Sole-Proprietors

At first glance, President Obama’s proposed 2011 budget appears to be a panacea to business owners. Who can go wrong with further extending small business tax credits like Make Work Pay, helping employees of small businesses save with an automatic IRA option, and eliminating capital gains taxes on investment in small businesses?

But did you notice one thread in common in all of those helpful budget items? That’s right – “small business”

What you don’t see in Obama’s 2011 budget proposal is any type of a leg up for the over 20 million sole- proprietors!

Sole-proprietorships make up 80% of businesses in the United States!

Sole-proprietorship start-ups go up during a recession.

Sole-proprietors plan to employ fewer people this year.  Probably because these intrepid entrepreneurs can’t catch a break when it comes to a tax code that is stacked against them. And thanks to Obama’s 2011 budget, it doesn’t look like they’ll be catching a break next year, either.  This plan is just what we need in a recession where unemployment tops 10%.

Worse, under this plan, the burden of working with 1099 contractors actually increases. In the best case scenario, that means more paperwork. In the worst case, businesses opt to work with fewer contractors – sole-proprietors!  Thanks for nothing.

Sole-proprietors should be fighting mad about this new budget proposal.  Here’s what we saw in 2011 budget (Hint: it’s a whole lot of nothing):

Repeal of the LIFO (Last in, First Out) Method of Accounting for Inventory – This insidious little budget item will adversely affect one of the fastest growing segments of self-employed inventory-holders – Ebay, Etsy and other eCommerce sellers.  “Last in, First Out” assumes that the goods most recently acquired by a store or company will also be the first goods to be sold.  Long story short, the LIFO method of accounting ensures that companies do not end up paying taxes on non-existent profits that only appear to have occurred due to inflationary increases.  Basically, the repeal of the LIFO accounting method was proposed as a way to trim the federal budget deficit at the expense of inventory holders. The government benefits while eBay, Etsy and other ecommerce sellers scramble and suffer.

Expanded Information Return Requirements – All sole-proprietors have a love/hate relationship with information returns. They have to turn W9 forms into the people who hire them, and send 1099 forms to the non-employee contractors that they have hired over the fiscal year (not to mention file 1099’s with the IRS). This process is time consuming and stressful for a sole-proprietor without an accounting department, and it’s about to get worse.

• Increased Penalties for Late Information Returns – The penalty for sending a 1099 out late will double (from $50 to $100!) with the maximum penalty as high as $500,000 per company! Do you know any businesses that have $500,000 lying around to rectify an accounting error?
• Increased Information Collection Required – Currently, a sole-proprietor can hire a contractor and let that contractor get right to work. The 2011 budget’s proposed reporting requirements would force sole-proprietors to take the time to explain the ins and outs of being classified as a W-9 contractor, including all tax, workers’ comp, and wage implications associated with that status. What happened to simply hiring a contractor and trusting that he is professional enough to understand his own tax liability? This sounds like make work for sole-proprietors who simply don’t have a heck of a lot of time for extra work. They are too busy earning a living.
• Taxes Must Be Withheld from a Contractor’s Wages – That’s right. Sole-proprietors and anyone else who employs a contractor would be required to withhold taxes from a W-9 contractor’s salary (if the contractor requests this service).  This is wonderful for contractors, and we applaud that, provided they want to pay their taxes as they receive payment rather than pay quarterly estimated taxes, but what about the work this entails for the sole-proprietors who hire them? Many sole-proprietors hire contractors because they do not have the manpower or capacity to withhold taxes. Talk about mounds of new paperwork involved with this requirement!  What was the president thinking? Clearly he wasn’t thinking about the added burden he was placing on 80% of the businesses in this country!

Make the $250,000 Section 179 Capital Asset Deduction Permanent & Extend Bonus Depreciation Deductions – While these provisions help small business owners who invest in capital equipment recoup some of their expenses faster, they do nothing for the lean mean self-employed person who gets her job done with nothing but her trusty computer or toolbox.  I mean, what freelancer or sole-proprietor depreciates her equipment? Nothing here for sole-proprietors. Moving on.

Automatic IRA Option for Businesses Employing More than 10 People – Once again, this budget item – which valiantly encourages employees to save for their own retirement – does nothing for the self-employed. How about incentives for the self-employed – which, may I remind you, make up 80% of small businesses – to set up IRAs? Right now, self-employed people have no way to deduct retirement savings before taxes.  This is great for W-2 employees, but nothing good for people who write their own ticket and make their own way in the world.

And here’s what we didn’t see at all:

The Government Doing Something Already About Self-Employment Taxes – How can we make it any plainer? Self-employment taxes are an unjust burden on the self-employed. Employees and employers split the 15.3 percent of compensation due for Social Security and Medicare (FICA) taxes, while the self-employed pay the entire 15.3 percent themselves.  Is it fair? It never has been.  Does the 2011 budget address this egregious inequity that affects 80% of the businesses in the United States? No!

Easing of Restriction on Home Offices Use for Schedule C Filers – Sole-proprietors currently have an enormous burden of proof on their shoulders when it comes to claiming a home office deduction. Is it any wonder many small business owners don’t bother to take the deduction, resulting in thousands of dollars that should stay in their hands – and their businesses – going to the government as taxes instead?

Simplified Mileage and Auto Expense Deductions – Just like with the home office deduction, sole-proprietors are forced to keep insanely meticulous records in order to claim a mileage deduction. Not to mention the U.S. government actually decreased the mileage rate this year from .55 to .50, placing the burden where else? On the shoulders of sole-proprietors! Five cents may sound like peanuts, but when you drive for a living, it sure adds up. Or in this case, subtracts from the sole-proprietor’s bank account.

Relaxing the Rules on Estimated Taxes for Schedule C Filers – Some sole-proprietors earn a comfortable living, other sole-proprietors are barely scraping by, either way, they all have to file estimated taxes four times a year. But what happens if you make all your money in the summer? Or at Christmas? Too bad, because you still owe the government a portion of your estimated income all year round.

Help!!

Sole-proprietors are some of the most nimble and flexible small business owners around. They are innovative, cropping up to solve problems and fill niches. And they are legion – the fact that sole-proprietors represent 80% of all businesses in America can’t be stated enough.  So it makes no sense that they continue to be ignored by the U.S. government. This latest 2011 budget proposal is only the most recent slap in the face.

What can you do? Join our plea on Facebook and educate yourself, here, on the issues facing sole-proprietors; while you’re at it, sign a petition to throw your weight behind a change. Fight for a fair health insurance premium deduction, battle unfair and impossible-to-calculate ecommerce and affiliate taxes, and raise your voice for a fair shake for the little guy.

And don’t forget to involve your family and friends.  Share this post on your Twitter, Facebook or via email, and don’t stop shouting until all business classifications receive equal treatment under the law!