Politicians who unabashedly call for raising taxes “only on the rich” by claiming that “the rich don’t pay their fair share” are being disingenuous with that rhetoric. They are fully aware that many of their rich campaign contributors are rich because they own successful businesses. As a result, many of them don’t take a salary, but receive profit sharing percentages, as shareholders. Since they don’t take a salary, they don’t pay W-2 taxes, thus giving minimal partial truth validity to their class warfare advocacy. This sin of omission has fooled millions into an unjustified false sense of victimhood, because the rich do pay income taxes on passive income. These taxes can cumulatively amount to huge sums, such as when Elon Musk disclosed he paid $21 billion in income tax for 2021.
Even Reddit Readers Are Fooled At First Glance
Since K-1 income is taxed at the personal income bracket level, taxes for payroll and self-employment are not deducted, creating an illusion that the funds are no taxed at all.
The notion that “the rich don’t pay their fair share” has even fooled Reddit readers upon an initial look. A Reddit poster put up a screenshot of their pay stub which carried the heading: “Get the President on the phone…I just got tired of paying taxes.” The pay stub contained the following information:
- Take Home (in bold): $215,204.58
- Gross: $216,562.28
- Retirement: – $1,666.67
- Other: $308.97
Dozens of Reddit readers replied with a mix of envy, incredulity and awe, with some offering jokes and guesses as to the poster’s occupation to earn $200,000 per year. The lack of income and other tax withholding led to some knee jerk responses about tax unfairness. Some of the comments included:
- “Probably a PMC (Private Military Contractor) secret squirrel somewhere in somewherestan.” – implying mercenary work or illegal arms trafficking.
- “I mean yeah, for one year go for it. Don’t do that s**t for multiple years though. Running from the IRS is a zero sum game. I tried it for 5 years and paid for it for 13 years.”
- “Tax exempt for the whole year? Is your plan to just not file?”
- “Now this is someone who does NOT think ahead. I love it.”
- “Look you can make that kind of money if you ask 215 thousand people for 1 dollar; go to New York or a big metro and ask people for one dollar.”
The other shoe dropped in the comments, when the poster disclosed that this payment was actually for a single month. The poster revealed that this payment was a K-1 monthly statement. It represented a monthly profit share commensurate with the owned percentage of the company business, which is apparently in Big Data.
After some amusing one-line replies to the responses, the poster then admitted to setting aside 45% of earnings to pay quarterly estimated taxes, which generated some relieved comments and additional jokes.
K-1 Taxes Are Not Chump Change
Although the poster didn’t have taxes deducted from his K-1 income, his overall tax bite comes out to a whopping cumulative 45%, which is hardly a case of “not paying his fair share.”
Schedule K-1 is a category designed for entrepreneurs and business owners to declare profit sharing proceeds from a business or principal share returns from a business liquidation. As the K-1 represents profits, they are funds that remain after the company has already paid expenses, such as payroll taxes and self-employment taxes.
Depending on the business entity structure, i.e., if it is a partnership, LLC, or S-Corp, the IRS may allow for a bookkeeping pass-through on corporate taxes for small businesses, deciding instead to tax the owners, or K-1 recipients, at the personal tax-bracket level. C-Corps are not eligible for this pass-through. Personal income tax brackets are still predicated on gross income, and K-1 income is usually considered passive income, so K-1 funds are categorized similarly to investment income.
In the case of the poster, he will inevitably be in the 2025 top tax bracket, which is 37% for income above $636,350 for single filers, or $752,600 for couples. His gross income of roughly $2.6 million for the year will still levy about $962,000 of federal income tax on him. While his location remains undisclosed, if he is in California, for example, he would be taxed an additional 12.3%, or $319,000. Therefore, since the poster’s business is in Big Data, setting aside 45% of gross take home pay is sensible, and if he is in California, may even fall short.
The average US salary is $66,790 according to the Census Bureau, which would fall into the 24.3% federal income tax bracket. With the poster presumably in the 37% federal + 12.3% state brackets and being taxed $1.281 million on $2.6 million income, this is hardly “not paying one’s fair share”, political talking points notwithstanding.
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