Mary Kay recruiters promote the idea that business expenses are good because they lower your taxable income. Maybe so, but you actually have to spend money to get a smaller benefit on your tax return. Is that spending wise?
Let’s assume you are treating Mary Kay as most women do, and have not created your own corporation. You report the income and expenses on a personal tax return along with your other income and, if married, file joint returns. And you say with pride, “Taxes were great, my expenses offset my husbands income nicely and added $2,000 to our refund.”
Don’t fool yourself – those “expenses that offset my husbands income nicely” were still expenses. The only way to get a business deduction is to spend money, and at tax time you will not recover all of what you spent. How much did that extra $2,000 refund really cost you? Would you have been better off with lower expenses and higher taxes?
First, what is your tax rate? Let’s assume it’s 20% federal and 5% state, for a total of 25%. That means that for every dollar you and your husband earn, $0.75 is spendable after-tax money. Looking at it another way, to have one dollar available to pend, you must earn $1.33 in pre-tax income ($1 / 0.75 – $1.333).
Now let’s assume you bought a printer for $200. How much will that printer cost you in pre-tax dollars? And how much does declaring the printer as a business deduction save you?
As a personal purchase, you have to earn $267 ($200 / 0.75 = $266.67) to have the $200 in after tax income to buy the printer.
As a business expense, that $200 printer does not reduce your taxes by $200. Rather, it reduces your taxable income by $200. The tax savings will be 25% of $200, or $50. That business deduction lowered your taxes, but you had to spend $200 to get the tax savings. You’re still out of pocket for $150.
Please don’t think your business losses are a good thing because they offset your spouse’s income. Sure, you may have had an extra $2,000 of your husband’s withholding returned in the refund check, but you had to lose $8,000 on Mary Kay to get the $2,000 refund ($2,000 / 0.25 = $8,000). Since when is spending $8,000 to get $2,000 a good thing?
Unless your Mary Kay business is breaking even, with your sales income paying for 100% of your product purchases, meetings, travel, hotels, meals, motivational tapes, and even the non-deductible but unavoidable expenses like dry cleaning the suit, your “tax savings” are an illusion. You are moving money from your spouse’s income to pay for your Mary Kay “girlfriend time”.