[amitutk]

The article almost hits on the rule of 30-30-30-10. 30% of revenue to rent, payroll and goods. You take home 10%.

If you have a restaurant or a coffee house with a revenue of $1 million, you take home $100K per year. Ouch.

Food is not an easy business.

[jacquesm]

You'd be surprised at the 'normal' margins for many kinds of businesses. In IT we have it super easy.

[SyneRyder]

Someone on Twitter posted an excerpt about profit margins from the Southwest Airlines CEO's book. Looks like it was about 7.5%. Or as the book puts it, the lost of just one customer per flight reduces their profit on that flight by 20%:

https://twitter.com/morganhousel/status/856493737308037121

[elcapitan]

If you want to look up margins by industry, Aswath Damodaran's valuation resources are a good start: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/...

[kalleboo]

And people wonder why airlines overbook...

[golergka]

Risks though.

[wavefunction]

100k personal profit on a mill in revenue is pretty nice actually in my opinion. I'm just working for a firm where my contributions are likely resulting in revenues higher than that and I'm receiving similar compensation, without actually owning the vehicle of growth.

If you've really figured out a way to grab 10% of REVENUE_X that's reproducible, you're a golden goose with your choice of owners.

[Naritai]

Maybe, except all evidence is that the restaurant industry is not reproducible year over year. Trends change, a new competitor opens down the block, or maybe the big employer across the street announces layoffs spurring customers to rethink their discretionary spend.

[falcodream]

What sort of tax do you pay on that $100k, in the US? Would it be taxed as if it were salary?

[dsr_]

That depends on how you do business.

If you set up a sole proprietorship, the profits of the business are your personal income.

Set up an LLC, and each of the partners gets their profit split taxed as personal income. However, profits can be reduced by spending more, and many more things are untaxable expenses for a business.

Set up an actual corporation, and you pay corporate taxes on profits, not income taxes. You still pay income taxes on salary.

[dboreham]

Short answer: yes it would.

Slightly longer answer: there are various ways allowed under the US tax code to receive income from a business and have it taxed not as salary; some of those ways have significantly lower marginal rates than if the income were salary; none of those tricks is going to do you much good at the $100k tier though. May as well think of it as salary for tax purposes.

What you could, and likely would do as this business owner with $100k in profit, is you'd arrange for the business to buy things that are legitimate business expenses but also make your life nicer and/or cause you to need to spend less money from your personal finances. e.g. you need computers, phones, tablets to conduct your business so now you don't need to buy any of those things with your own money. You can't do this with cars, fwiw.

[HeyLaughingBoy]

You can't do this with cars, fwiw

Since when? I've known a number of people who bought their vehicles with business money for a business writeoff. The least likely to survive audit was the carpenter whose Corvette was a "company car."

Yes, he had a separate (junky) work truck.

[abalashov]

Disclaimer: I'm not a chartered accountant or a licenced tax advisor.

In the US, personal earnings are subject to two categories of tax: (1) payroll (Social Security and Medicare) tax and (2) income tax. These work very differently.

Payroll tax is assessed on the top line of your income (e.g. the $100k) and is a flat rate (15.3% for self-employed individuals). Income tax is assessed on that $100k after itemised and/or standard deductions. Most states also have income tax, and you can deduct what you paid to the state from your taxable income for federal tax purposes and so forth. You can also deduct half of your self-employment tax. Some top-tier cities also have municipal income tax (e.g. SF, NYC). It gets complicated.

So, in a worst-case scenario (the one I ran with for years out of laziness and ignorance), you make $100k, you pay $15,300 of payroll tax on it, then you pay some additional amount of income tax based on a figure lower than $100k, and subject to graduated tax brackets at the state and federal level. The federal tax will unquestionably be higher. But the amount you pay income tax on will be adjusted downward based on tax-deductible factors like mortgage interest, dependents (children) and so forth.

Wage and salary _employees_ do not pay 15.3% in payroll tax. They pay 7.65% and their employer pays the other half.

As a practical matter, what most small business owners smarter than me do is that they choose an incorporation structure which allows them to be employees of that entity, rather than self-employed. An Subchapter S corporation ("S-Corp") is very popular. This allows them to take some portion of that $100k as salary and some of it as a "distribution" (kind of like a dividend), with the latter not subject to payroll tax at all, but only income tax.

There are no definite rules on how much you can take as salary and how much as distribution. Extremes obviously won't fly with the IRS, such as paying yourself a $10k salary and the other $90k in distributions. However, in general, the salary one can get away with paying onesself can be rather generously low, as it usually takes into account the "just starting out" characteristics of the business and is based on the lower end of the spectrum for market-rate compensation in the given field. So, a good accountant will typically set up a salary of something like $30k (+/-) in this hypothetical scenario. Or less if it's a coffee shop, since baristas aren't highly paid. The general rule is to pay yourself the smallest salary you can get away with, since only salary is subject to payroll tax. You'll pay 7.65% payroll tax on that (with the company kicking in the other 7.65%), and just income tax on $100k, graduated and after deductions.

This leads to considerable savings. A number of people I know, as well as myself, pay(paid) far less in income tax than they do in payroll tax, once deduction-maximising strategies are considered. As a hypothetical example, $2300 in payroll tax on the salary, then something like $15k-$20k in income tax.

Actual income tax varies wildly with available personal deductions, but that would be fairly typical for someone married, with children, a lower-earning or non-working spouse, and a house on whose mortgage they pay interest. Single people who don't have many itemised deductions to exploit on the personal side of their tax return are disadvantaged and may pay more (e.g. $25k-$30k). You can get some idea here:

https://taxfoundation.org/2017-tax-brackets/

[dboreham]

ymmv, but according to our business accountant this trick of paying yourself a very low salary is not kosher with the IRS. They want to see a salary that is justifiable in the context of the market rate for the job(s) you perform for the business. If your salary is significantly lower than that, they are not happy. They are also aware of the idea that the CEO of a coffee shop is not in fact a barista.

Also remember that the FICA tax is capped, so above $117k taxable income there isn't such a big spread between wages income and schedule K income.

[abalashov]

That is all correct. I guess it just varies with what is considered "very low" and the personal taste of your accountant.

[tiatia]

"Food is not an easy business."

Business is never easy, except if you are lucky. They guy was an idiot. Rule #1 in many businesses (e.g. coffee ships, restaurant, hotels, hostels etc.) you are not in the food business or hospitality business but in the real estate business.

[no_flags]

I don't get it. How are they in the real estate business?

[tiatia]

Do you know the 3 most important things in Real Estate? Location, Location and Location.

Also, besides the location, a cheap rent is crucial to your success. I have seen dentists (in Europe) going out of business because of the rent. In many businesses you are in fact in the real estate business. Have you seen the recent movie about McDonnalds? "Founder"?

Quote: " You build an empire by owning the land. You're not in the burger business. You're in the real estate business."

[tiatia]

Wow. Downvoted again. I guess the people who downvote me are the same who would make such blog posts.

From the article: "The small cafe connects to the fantasy of throwing a perpetual dinner party."

Face it gentlemen. This guy was an idiot.