Personal experience of a businessman: how much taxes do I pay in the USA and Russia

Alexey Kudimov is the head of Direct Line Digital. He is engaged in website creation and SEO promotion. He has experience doing business in both Russia and the USA, and he decided to compare the level of taxation. What came of it, the publication told VC.RU.

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“When I moved to the USA, I had an intrusive idea that taxes here are very high. I don’t even remember where this myth came from,” notes Alexey.

There may be several reasons for this attitude, in part it is based on films, where the heroes very often complain about the complicated tax system and unaffordable payments. It can also be connected with the Russian media, where taxes in the United States are described as almost the most important evil in the country, which does not give life to ordinary people. But, as it turned out, reality is much different from media and films.

Personal experience

In Russia, all citizens pay 13% of their personal income, although for those who live outside Russia for more than six months a year, the rate rises to 30%.

“I believe that paying 13% of their income to all categories of citizens of the country is an extremely unfair decision; the American taxation system in this regard is closer to me, although it is far from ideal,” writes Alexey. — In the USA, the system is so confusing that accountants in companies don’t even try to calculate the taxes they must pay for employees. For this, there are Payroll Companies, which outsource all calculations.”

Companies send a detailed report with employee data twice a month. The company calculates all taxes, takes money from the account and sends salaries to employees, and taxes to the state.

In addition, you also need to pay Social Security and Medicare taxes (FICA).

• Federal tax - 6,57% - $3
• FICA - 7,65% - $4
• State tax - 0% - $0
• Local tax - 0% - $0

The final tax rate turns out to be about 14,21%, which is not significantly higher than the 13% that Russians pay.

“In addition to the federal tax, there may be additional state and city taxes. In Austin, Texas, where I currently live, there is no personal payroll tax, but this is offset by high property taxes, the author writes. — In Denver (Colorado) I had a state tax. When I moved to Austin, my after-tax income increased by several hundred dollars each month. It's important that you can deduct your charitable expenses, mortgage interest, medical expenses, and moving expenses from your taxes. But there are a lot of different nuances, so I never bothered or subtracted anything.”

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Also, in the US, money that you decide to put aside in a retirement account is tax-free. But when you reach retirement age, you have to pay 6% of the total to receive the accumulated money, but this is much lower than the payroll tax.

“I really like this system: “People with low incomes pay less taxes.” If you work as a software engineer at Google in Austin, then. you need to pay significantly more taxes, although this is still quite acceptable - 20%,” writes the author.

There are many personal tax calculators online. You just need to enter your income, city, state, marital status, and so on.

When you are hired, you fill out a W-4 form that allows you to take tax cuts based on your household size. The tax is influenced not only by the presence of children, but also by all dependents. For example, if your wife does not work or has a lower salary, then you will pay less taxes.

And if you live alone, then you will have to pay much more taxes than a person with the same salary, but who has a wife or husband. In general, every person who depends on your income cuts taxes by about 2-4%.

“Previously, a personal exemption of $4100 was also deducted from the tax base (depending on the number of children: one child — a deduction of $4100, two children — $4100*2). This deduction has been canceled since 2018,” writes the author.

Many Americans pay personal accountants to manage their finances, including tax refunds.

Business taxes

To correctly compare the taxation system in Russia and the United States, you need to compare different forms of ownership and their differences.

“We have two different companies in the USA and Russia, affiliated through the owner. In Russia it is an LLC, and in the USA it is a C-Corp. An LLC is a limited liability company, where the owners of the company are not liable with their personal property for the company’s debts, and the income tax is 20%, notes Alexey. “The key tax for the IT industry is insurance payments, that is, the salary tax, since up to 90% of all company costs are wage costs, that is, this is a very significant burden on companies.”

“Standard insurance payments from wages in Russia are 30% (22% - pension, 5,1% - medical, 2,9% - social), but for the IT industry there is an opportunity to pay 14% at a preferential rate, which is what we we do. To receive this discount, you must have 90% of your revenue from IT. The benefit is valid only until 2023, unless extended,” the author adds.

C-corp is a form of ownership that is automatically issued when a corporation is registered. C-corp has a fixed income tax rate of 21%, which was also introduced by the administration of US President Donald Trump.

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In addition, the state and city in which the company is registered will also take a percentage of the proceeds. For example, in Philadelphia the tax is 1,4% and is taken only from those companies that are registered in this city. But insurance payments per employee are extremely lower and amount to 10,6% per person.

“It should be noted that our company does not pay Sales Tax, as we sell services. If a company sells products, then their taxes are significantly different. For example, in Texas, they have to add 6,25% for each sale to the original price of the product. This is their analogue of VAT.

Only it is never written on the price tag, and as a result, at the checkout the difference in price can be significant, especially in states like California, where the state tax and the city tax can reach up to 15%, notes Alexey. — If a company sells in different states, it must register and pay taxes completely differently. It’s fine when sales take place in only two or three states, but if our sales people start calling or writing to ten different states, then we’ll have to look up completely different rules ten times and pay for them.”

“To calculate taxes, let's take an ordinary IT company that spends 70% of its income on employees, with a 20% profitability. Then we get the following numbers.

• C-corp - 10,85% - $108
• LLC - 25% - $250
• LLC (IT discount) - 13,80% - $138

As a result, the tax burden in Russia is extremely higher, without an IT discount, the difference is almost 2,5 times.

Relationship to taxes in the United States

Of course, no country likes to pay taxes. In the United States, people often get upset when their payments decrease, but Alexey says that he got the impression that this frustration is more of a false one, since you can track where the money is going at any time.

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“In the US, when you go outside, you see all the money you pay every month around you, so the slight disappointment of taxes is dulled. Or, for example, the quality of education at the school your child goes to directly depends on the amount of tax paid. Therefore, many pay taxes with pride, because they see what they are paying for,” says Alexey. — This situation is very different from what I am used to in Russia. In our country, if you are a law-abiding taxpayer, then in the eyes of the majority you look like an idiot. I think the reason is not even that taxes are very high, but in how they are spent, because this is the main problem.”

The conclusions from this whole situation are very interesting.

“It turns out that all my prejudices were wrong, and working here, you will pay the same taxes as in Russia. If you have a family, children and a mortgage, then even a smaller amount than in Russia. You will only pay marginally more if you become a wealthy class, which is generally more likely to be true, the businessman writes. — It turns out that doing business in the USA is much more profitable than in Russia. “Salaries in envelopes appeared for a reason, but because our social taxes are greatly inflated, provided that for this money we receive social services of catastrophically low quality.”

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