Small Business Owners and the Top 1%

Concerns and comments about income inequality have been ubiquitous in the media since the State of the Union Address. Who are the one-percenters? Where do small business owners stand?

According to Forbes, to be within this elite income group, a person needs annual income of about $394,000 from personal services or investments. According to the IRS, you need income of about $389,000 (based on figures from 2011 tax returns). This group reported 19% of all the taxable income in the U.S. and paid 35% of all federal income taxes for individuals.

Small business owners

Almost all of small businesses in the U.S. are set up in such a way—as sole proprietorships, partnerships, limited liability companies, or S corporations—that owners pay personal income taxes on their share of business profits. How many small business owners fall within the top one-percenters? It’s difficult to tell. Here are some clues:

  • From IRS statistics, of the more than 8 million owners who had Schedule K-1 income from partnerships (including LLCs that report as partnerships) and S corporations, they had income of $425,384,000,000. This works out to about $53,000 of income per owner, which is a far cry from the approximately $390,000 of income needed to fall within the top 1%. But these are averages, so some may well have income from businesses and other sources putting them in the top 1%.
  • According to the Urban Brookings Tax Policy Center, of the income reported by the top 1%, 24% came from business income.
  • Payscale reports that the median salary for small business owners is $77,180; this would be something limited to S corporation owner-employees and does not take into account owners’ share of profits.

Top 5%
Even if only a handful of small business owners fall within the top 1%, many probably find themselves in the top 5% of individuals.

The U.S. Census Bureau fixes the threshold for the 5% group at household income of $232,000. And it is within this group that many of the federal tax limitations, surtaxes, and other restrictions begin to apply (see my article in SmallBizTrends).

So what does this mean?
Are small business owners considered to be in the elite? If so, are we going to be objectified by some in the media as being insensitive to income inequality? I’m not sure.

What I do know is that small business owners need to stand up and be heard on the issues that concern us, such as onerous government regulations and taxes. It’s only by making our businesses profitable despite regulations and taxes that we can stay in business and create jobs, which helps up remain or get into the elite income group. And, after all, isn’t that what for-profit businesses and their owners are all about?


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