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Fact Check: Democrats Disguise Build Back Better’s Mom & Pop Paycut as “Closing a Loophole”

July 18, 2022

As Senate Democrats attempt to revive their Build Back Better tax hikes, they’ve tried to rebrand a “Mom & Pop Paycut” – a tax on small business owners, who employ nearly half of the American workforce – as merely “closing a loophole.” But according to the National Federation of Independent Business, this is a new small business surtax that even Democrats, when passing a similar version of the tax, specifically exempted small businesses and pass-through businesses from because it would wreak economic devastation on Main Street.

Now, America’s small business owners are saying: “My small business is not your tax loophole.”

Claim: This is just a tax on high-income individuals. 

Fact: Many small businesses are organized as pass-through entities like LLCs and S corporations – meaning that business income is included on a business owner’s individual IRS Form 1040. That means that while “business income” may look strong, the amount of the small business owner’s “take home pay” is almost certainly lower. Sometimes far lower, because the “business income” must be used to maintain operations, invest in employee benefits, hire in a tight labor market, expand the business, or save for future challenges like a recession.

Example: A small business owner with $600,000 in ”business income” does not take home all that money, but instead re-invests it into their employees and their business.

Claim: Small business owners do not pay Medicare taxes.

Fact: All employers pay Medicare taxes in the form of payroll taxes on their employees’ wages and self-employment taxes on their own compensation.

Claim: President Biden is upholding his pledge not to raise taxes on those earning less than $400,000 a year.

Fact: The new Mom & Pop Paycut doesn’t distinguish between “business income” that is re-invested into business operations and “take-home pay.” If small business owners’ tax filings show income above $400,000 (individual filers) and $500,000 (joint filers), they will be taxed as though they took home the full amount, even if they didn’t.

Worse, the threshold is even lower for family businesses held as trusts, with the tax applying to income above just $13,000. With inflation pushing up prices, the tax will hit an increasing number of small business owners and an increasing percentage of pass-through business income every year.

To read more from the National Federation of Independent Business, CLICK HERE.

READ: One-Pager: Democrats’ “Mom & Pop Paycut” is a Small Business Surtax on America’s Small Business Owners