Most business owners know that if they are going to produce a product or service there are some, identifiable costs of doing business. These include costs of materials, labor, rent and utilities for the building, and marketing. But are these all the costs? No, they aren’t. Let’s explore some of the hidden costs of business foisted on us by various levels of government.
If the business is in a city or town, there are local taxes, permit fees and business licenses. Many counties add another layer of taxes. In Gwinnett County, Georgia, these taxes are collected in advance, based on projected revenue (not profit). This number is then corrected when the license is renewed.
The vast majority of states charge both sales tax and income tax on businesses. In the case of sales taxes, there is a monthly requirement to report and pay and failure to do so can result in pretty healthy fines. Of course, we all recognize that the Federal government takes a huge chunk of profits through income taxation. None of these taxes are a real surprise to those who have been in business more than a year or two, but what are the hidden costs?
Let’s start with labor costs. Assuming an employee gets paid $15 per hour and works 40 hours a week, simple arithmetic says that cost is $600 per week. Wait a minute, that isn’t quite right. Under federal law, an employer must pay 7.65 percent of that $600 to the IRS for the employer’s share of Social Security and Medicare. That means the $600 now becomes $645.90. The business owners also must pay worker’s compensation once they reach a certain threshold (3 employees in Georgia). Unemployment tax is assessed at both the state and federal level. Even without any employee benefits, these extra taxes have resulted in an exceptionally complex payroll system requiring professional assistance. In most cases, this adds to the cost of doing business.
Sometimes a business owner will try to avoid many of these costs by paying workers as contractors. Sounds like a good strategy, save costs and let the employee deal with the tax issues. Before considering such a move, and risking the state and federal fines that may ensue, read Employee vs Contractor on my website. Done improperly this strategy will cost much more than it will save.
The fees and taxes described above at the local, county, state and federal level must be worked into the plan for pricing a good or service. Maintaining compliance requires a system to track and ensure all taxes are paid on time, especially those that recur several times during the year. The good news is that for most small and even medium size businesses, this doesn’t require a full-time employee. This is a task that can be managed by an outside accountant. While this will add to the cost of compliance, it is a deductible expense and will save penalties that are not deductible and will cost much more than fee charged by the accountant.
Trying to compete on price may or may not be a good idea but undercutting the competition without a good grasp of these hidden regulatory and other hidden costs will be disastrous. Pricing is a very delicate balance of all factors that go into a product or service. The factors involved start with the direct cost of producing the good or service. Once the direct costs are calculated, a pro-rata cost must be added for the overhead costs. Once these costs of doing business are calculated, the cost of taxation must be added including the cost of professional help.
Finally, the business owner should reevaluate the business monthly to see if the business appears to be following the business plan. The business probably won’t be profitable in the first few months because of startup costs, but a detailed examination of the Profit and Loss statement, with the help of a competent and unbiased professional, should help the owner make necessary changes to reduce costs and possibly raise prices if warranted.