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GSBA Blog Advocacy Posts

Business Income ≠ Wages

| Jul 06, 2017

This letter was sent to the Seattle City Council on July 6, 2017. GSBA encourages its members to contact the Council (click here to find your councilmembers) before the final vote on Monday, July 10.

Honorable members of the Seattle City Council,

The Greater Seattle Business Association (GSBA) has had tax reform as a priority in our legislative agenda for many years. Historically we have proudly supported the imposition of an income tax, including the unsuccessful Initiative 1098. We also deeply appreciate the attempt to address the crushing regressivity of our current tax structure (reliant on sales, property, and B&O taxes), which we are well aware is the worst in the nation.

Regarding the current proposal from City Council, we have heightened concern that we hope you will address before finalizing the ordinance – namely the adverse impact on a large number of small businesses using pass-through entities such as limited liability companies (LLCs), partnerships, S-corporations, and sole proprietorships. GSBA’s membership included hundreds of these businesses. The current proposal treats business income for LLCs, S-Corporations, and sole proprietorships as personal income. Specifically, the bill uses “total income” as defined by line 22 of IRS Form 1040 (and equivalents), which includes all income before adjustments, deductions, and credits. Most income taxes imposed by other states and cities around the country start with federal net taxable income. While the City Council’s stated goal is to tax the wealthiest Seattleites, you are inadvertently going after many of our city’s small business owners who are anything but wealthy.

Income reported by a LLC, S-Corp, or sole proprietorship is not the same as wages. Wages are commonly understood as a measure of cash amount actually received by an individual. The income of these small businesses is simply the measure of the business’ income but does not reflect how much of that profit is being reinvested in the business. Taxing the income of these entities will reduce the amount available for reinvestment, as well as unfairly target small business owners.

This provision taxes businesses organized as LLCs, S-Corps, or sole proprietorships but not corporations. It is not equitable to tax one type of business but not another. The small businesses using these forms of ownership are put at a disadvantage to what are usually much larger businesses.

Due to the “total income” target by City Council, retirement savings of LLCs, S-Corps, and sole proprietorships will be taxed twice. Business income is included in line 22, but retirement contributions are deducted on line 28. When that person retires and starts taking their retirement distributions, that income is reported on line 15, so therefore is also included in line 22 and in Seattle will then be taxed for a second time. For a person with W-2 income, the retirement contribution is deducted from their gross wages and is not included in line 22. Therefore, if you have two people (one self-employed, the other with wages) who earn the exactly same amount of income and have the same retirement deduction, the self-employed person ends up paying more taxes.

We hope that the City Council will hear our concerns and act to ensure that the proposed income tax is properly targeting the wealthiest of our residents and not those who are ostensibly supposed to be finding relief from regressive taxation.