As a small business owner in California, 23 employees as of 4/4/16, I certainly have an opinion on this.There are approximately 2.2 million minimum wage workers out of approximately 18 million workers in California. This number includes minimum wage jobs that earn tips, commissions, under the table pay and others.u00a0 That means the true number of minimum wage workers is lower, probably significantly lower considering there are 1.4 million restaurant workers.https://www.restaurant.org/Downl...The current minimum wage in California is $10/hr.u00a0 Under this new legislation, the increases are:2017: $10.50/hr2018: $11/hr2019: $12/hr2020: $13/hr2021: $14/hr2022: $15/hrBeyond 2024. Minimum wage will continue to increase each year at the rate of inflation.UNIONS:Several unions in California have been trying to get labor backed ballot initiatives on the ballot for years.u00a0 Many believe they would have been successful this year.u00a0 Their initiatives called for everything from an immediate $15/hr minimum wage, or higher, to additional vacation time, sick time, family leave time and other things.u00a0 California almost had no choice but to negotiate and make this change to eliminate the possibility that the unions would be able to pass an initiative that would have placed a heavy burden on business with virtually no ability by the government to regulate it.THE EMPLOYEE:I'm sure every true minimum wage employee wants to earn $15/hr.u00a0 But, there is so much to consider.u00a0 In a full time work year, there are 2,080 hrs.u00a0 A $10/hr employee would therefore make $20,800/yr working full time.u00a0 Most employees at this level or below, are eligible for some government subsidies.u00a0 Those subsidies increase if they are a single parent, disabled and if they meet other conditions.u00a0 For many, the subsidies include housing.You MUST consider the tax consequences of making more money before you can determine if the increase is good or bad for the employee.I used the TurboTax calculator to determine the below numbers:https://smartasset.com/taxes/cal...At $10/hr, full time, single, living in Los Angeles, here are the taxes:Income: $20,800/yrFederal @ 15% marginal rate = $1,114FICA @7.65% marginal rate = $1,591State @ 2.00% marginal rate = $257Localu00a0 .00% Margianl rate = $0Total tax = $2,962Effective tax rate = $14.2%Total take home = $17,838At $15/hr, full time, single, living in Los Angeles, here are the taxes:Income: $31,200/yrFederal @ 15% marginal rate = $2,674FICA @7.65% marginal rate = $2,387State @ 4.00% marginal rate = $636Localu00a0 .00% Margianl rate = $0Total tax = $5,697Effective tax rate = $18.25%Total take home = $25,503For the additional $10,400 in annual income, the additional tax is $2,735, for a net gain of $7,665 ($638.75/month).The unknown is the value of any subsidies that will be lost because the individual moves into a different state tax bracket; CA 2% to CA 4%.u00a0 It could be significant if it is an issue of housing.u00a0 In fact, the loss of the subsidy could be more than the net gain by the increased wage.u00a0 But, this is unknown.u00a0 Also unknown is if the person has any garnishments, such as child support.THE EMPLOYER:Most people are unaware that the employer matches, roughly, the tax liability of the employee.u00a0 The following is my actual payroll chart of accounts, right out of my accounting system:That's 18.95% on top of the employee's wage.u00a0 Worker's comp for me is $5.05/$100 of wage paid.u00a0 That's an additional 5.05% on top of the 18.25% for a total cost of 24% of the employee's wage.-A $10/hr employee costs the business $12.40-A $150,000 payroll increases to $186,000 after taxes and worker's comp.-A $15/hr employee costs the business $18.60-The payroll is now $225,000, $279,000 after taxes and worker's comp (assuming no decrease in the number of employees).That should make sense because it's a 50% increase in payroll from $10/hr to $15/hrA small business with gross sales of $1,000,000/yr, with a taxable income of 15%, would have a $150,000 profit before taxes.u00a0 For a small brick and mortar business to make 15%, that's actually pretty good.u00a0 Better than the vast majority of small businesses.u00a0 And, BTW, a $1,000,000/yr small business is rare.u00a0 Most are at the $250,000/yr level or below.A business owner, single, living in Los Angeles, will pay taxes of $51,429 (a 34.2% effective tax rate) on the taxable income of $150,000.u00a0 The owner's take home pay would be $98,571.u00a0 Of course, this isn't what the owner takes home because some money needs to be left in the business and some needs to be reinvested in the business. But, for now, let's say that is the amount taken home.Let's make the assumption the business owner has all minimum wage employees and the payroll on this business is $150,000, $186,000 after taxes and worker's comp.u00a0 As noted above, an increase from $10/hr to $15/hr will increase the payroll to $225,000, $279,000 after taxes and worker's comp.u00a0 If the business owner's after tax income is $98,571, with the wage increase the owner's take home is reduced to $5,571 ($279,000 - $186,000=$93,000.u00a0u00a0 $98,571 - $93,000 = $5,571).Let's get back to the issue of leaving money in the business.u00a0 An annual payroll of $150,000, $186,000 after taxes and workers comp has a monthly payroll $15,500.u00a0 An annual payroll of $225,000, $279,000 after taxes and worker's comp has a monthly payroll of $23,250.u00a0 The owner needs cash reserves, not just for payroll but for other things as well.u00a0 A percentage of sales is a good way to determine the amount necessary and I personally use 25%, I try to keep no less than that amount in cash reserves.u00a0 Investment in the business is important; updating furniture, fixtures and equipment is mandatory or the business will no longer be able to compete in the market. I'd also like to be working towards retirement.u00a0 I'd also like to be working towards purchasing another business.u00a0 For all of the liability that I've accepted, this is part of the reward that should come along with it.If the owner's take home is only $5,571, how can money be set aside?u00a0 Where will the funds for investment come from?u00a0 How about something simple such as making sure payroll can be met? Retirement? Buying another business?The one huge glaring item that's missing from this; the loan payment on the business.u00a0 The principle of the loan payment is not tax deductible.u00a0 The remaining principle amount left on the loan sits on the balance sheet and it is not tax deductible when filing taxes.u00a0 Only the interest is tax deductible.If the owner has an SBA loan of $150,000, amortized over 7 years at 4.5%, the monthly loan payments are $2,085.02.u00a0 For simplicity, let's say half of that is principle; $1,042.51.u00a0 That's annual principle payments of $12,510.12.After the reduced take home of the owner to $5,571, subtracting the annual loan payments of $12,510.12, the owner's real cash flow take home is now -$6,939.12.CONCLUSION:A business owner, who owns a million dollar business, will have the liability of lawsuits, the labor board, EDD, Franchise Tax board, banks, the IRS, and others.It is no longer worth the liability to work 60-80hrs/week to take home -$6,939.12 after taxes.u00a0 I'd rather get a minimum wage job working 40hrs/week making $25,503 after taxes with no liability.u00a0 In fact, a second job working an additional 10hrs/week, would add an additional $7,800 annually before taxes.So, minimum wage, working 50hr/week, having 2 jobs:Income: $39,000/yrFederal @ 15% marginal rate = $3,844FICA @7.65% marginal rate = $2,984State @ 4.00% marginal rate = $1,059Localu00a0 .00% Margianl rate = $0Total tax = $7,887Effective tax rate = $20.22%Total take home = $31,113THE REALITY/MY OPINION:In our scenario (which is very real):Business owner: -$6,939.13 after taxes.Minimum wage employee working 50hrs/wk: $31,113 after taxesIt's no longer worth owning a business.u00a0 Simple as that.And the employees?u00a0 They will all have to find another job.What California is doing is actually a big experiment.u00a0 If you ask 10 economists what they think is going to happen, you will get 10 different answers.The larger employers will not be hurt as badly as the small employers.u00a0 I suspect that gardening services, plumbers, electricians, dry cleaners, alterations services, dentists, some Drs and industry such as wigs, eye glasses and the like, will be hurt very badly.u00a0 These are the businesses that have 1-3 employees.u00a0 They simply can't absorb a 50% increase in payroll.u00a0 More employers will pay under the table, some will cut hours and a few will simply lay off their employees.Those employees that have no skills, younger employees looking to learn, they ware going to have a very difficult time finding work.u00a0 Hiring a high school student at $10/hr and teaching them skills and THEN increasing their pay, is much better than hiring that same high school student and starting them higher, with no skills.u00a0 Those older employees that have some skills will get the jobs.u00a0 The younger employees will simply be passed up.As a business owner, I can tell you with absolutely certainty, I will get back to that $150,000 payroll number so I can stay in business.u00a0 Employees are going to be laid off, hours will be cut, prices will increase and hours might be reduced.u00a0 Landlords might be asked to reduce rent, the business might reduce the size the footprint (sqft of the business), or move to a smaller, less expensive space to reduce costs.The government are the real winners in this.u00a0 Everyone else loses.u00a0 They are collecting more tax revenue while creating more problems for the very people they are trying to help.u00a0 This is all done on the backs of the small business owner, who in essence will be working for slightly above minimum wage while shouldering the burden of all the liability.A MUCH BETTER SOLUTION:Raise the minimum wage to $15/hr.u00a0 However, only tax the worker on $5/hr.u00a0 For the worker making $31,200 working full time at $15/hr, their total tax would be $870.u00a0 I would keep this $5/hr tax in place until until $22/hr ($45,760/annually)EMPLOYEE - for a comparison:-$10/hr, full time = $20,800, taxes of $2,784 = $18,016 take home.-$15/hr, full time = $31,200, taxes of $5,697 = $25,503 take home.-$15/hr full time = $31,200, taxes on $5/hr, $870 = $30,330 take home.BUSINESS - for comparison:I would propose exactly the same, only tax $5/hr up to $22/hr.u00a0 This would lower payroll taxes of our scenario above, on the $150,000/yr payroll from $36,000/yr to $18,000/yr, all while INCREASING the pay of the employee.I would also propose a tax credit for reinvestment in furniture, fixtures and equipment of the business.u00a0 This would give the business owner an incentive to make the workplace more productive and safer for the employees.u00a0 Because the payroll tax is 24%, I think 24% of all reinvestment as a tax credit would be great.-$150,000/annual payroll with all $10/hr employees = $186,000 total payroll costs after taxes and workers comp-$225,000/annual payroll with all $15/hr employees = $279,000 total payroll costs after taxes and workers comp-$225,000/annual payroll, $15/hr employees, tax on only $5/hr and $50,000 reinvestment with a 24% tax credit = $231,000 total payroll costs after taxes and workers comp and reinvestment tax credit.That's still a $45,000 increase in payroll, 24%, and that definitely stings if you're a business owner.u00a0 But, it gets everyone closer to where we need to be; more money in everyone's pocket.FINAL SUMMARYSmall business are already taxed to death.u00a0 They pay federal, state, county, city, Franchise Tax board, business licensing fees, dues, subscriptions...it's really outrageous.By raising the wage, small business will be paying more.u00a0 There's no way around it. I fully suspect most small businesses will react by cutting expenses, which might also include getting rid of employees, benefits and other perks.I predict in 7 years:-Unemployment will be higher than it is now-There will be fewer small businesses-Prices will increase at a rate higher than inflation-Businesses and people will continue to leave California-Workers and the businesses will be equally as upset as they are now-We will be having this same discussion again-Government will do what they do best, blame someone to rally everyone and then raise everyone's taxes.u00a0 Again.
