How Does Raising Your Company’s Prices Impact Your Taxes


In this inflationary environment, many companies have to raise their prices to continue to pay higher wages, taxes and expenses and at least stay even in terms of profitability. NFIB reports that 70% of small businesses have raised prices, especially in industries such as wholesale, construction, retail and manufacturing. And 46% of homeowners plan to implement price increases (including some that have already raised prices). When prices go up, companies focus mainly on how this affects customers … Will higher prices discourage sales? But don’t forget the impact that higher prices have on taxes.



Income taxes

Raising prices can be a wash in terms of profits; more revenue, but higher expense deductions may cancel each other out. But one of the reasons for the price increase is to increase benefits. If price increases generate more revenue than total spending increases, it means higher profits. NFIB reported that among homeowners who reported higher profits, nearly one in five (19%), attributed it to higher prices. As profits increase, expect to pay more in federal (and, if applicable, state and local) taxes.

For owners of broadcasters, the tax on their share of profits depends on their tax bracket. More profits can push homeowners to a higher tax bracket, resulting in a higher tax rate on the part of the taxable income that is within a higher tax bracket.

Self-employment tax

For self-employed business owners, higher profits translate into higher net profits self-employment tax is based. Higher net earnings … higher self-employment tax.

The Social Security share of self-employment tax, which is 12.4% of 92.35% of net income, is limited (net income in 2022 of up to $ 147,000). There is no limit to the Medicare portion, which is 2.9% of 92.35% of net earnings. Yes, half of the self-employment tax is deductible as a personal deduction from the landlord, but the deduction does not eliminate the tax increase.

Additional Medicare taxes

There are two additional Medicare taxes: one based on income earned and one based on investment income. Both taxes have a threshold that is not adjusted annually for inflation: $ 200,000 for singles and $ 250,000 for married people filing together.

  • Higher net income from self-employment may result in or increase 0.9% of earned income.
  • Owners of sole proprietorships, corporations, corporations and limited liability companies who are merely passive investors and who, as a result of higher prices, have higher profits, may have to pay (or pay more) for net investment income tax (NII). 3.8% tax on your share of profits (this is a simplification; there is a formula to calculate the NII tax).

Sales taxes

Sales tax obligations depend not only on what you sell, but on where and how much. Five states (Alaska, Delaware, Montana, New Hampshire, and Oregon) have no sales tax. Even when there is a sales tax, some goods and services may be exempt, so sellers do not have to collect the tax. But most locations require sellers to register, collect sales taxes, send collections to the state, and file returns (usually quarterly). These obligations do not depend on the amount you receive or the income you receive.

But if you are a remote seller (that is, you sell online to customers in another state), your sales tax obligations to collect, remit, and report to that other state are triggered if sales exceed a threshold amount. . States have different thresholds, but this usually means sales of $ 100,000 or more. Rising prices can cause a distance seller to exceed the threshold. In some states there is an alternate threshold based on the number of transactions (for example, 200 or more); it is difficult to say whether price increases would affect this alternative threshold.

Conclusion

Rising prices may be desirable or necessary, and tax results may not be an important part of the decision on price increases. Just make sure you take into account any additional taxes and liabilities that may result from the increase in revenue resulting from the price increase. Work with your CPA or other tax advisor to find out what tax impact any price increase can have on you and your business.

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