One of the primary reasons a person decides to go into business for themselves is so that they can make more money than they are as an employee at their current job. Yes, being your own boss, having more flexibility in time, and having better tax advantages are other good reasons, for many it comes down to being the owner means you (should) make the most money.
Everyone wants to make six figures. That is a very good business world. In another decade or so even a high five-figure income could be the definition of the poverty level. But making money is one thing and keeping it another. Here are some suggestions to help you keep more of your money.
The first item to be very aware of is where the tax brackets start. In some cases, making a little more money in your weekly paycheck could cause you to lose a lot more after taxes.
Here is an example:
In 2015, if your annual income was $190,000 you would be in the 28% tax bracket. This means that without any other deductions your taxes owed to the IRS would be about $53,200 and you would net $136,800. If you could work a little more, get some over time, you might be able to earn an extra $1,000. This would bring your total annual salary to $191,000 and add 5% more to your tax bracket, bringing it up to 33%. This equates to $63,030 in taxes owed and a net of $127,970. In this example, by earning an extra $1,000 and moving into the next tax bracket you would end up keeping $8,830 less.
So by earning an income that puts you just into the next tax bracket could actually cause you to lose more money at the end of the year, not being able to keep more for yourself.
The next item, or set of items, is to look at the kinds of things you currently purchase with post-tax dollars versus pre-tax dollars. A post-tax dollar is a dollar, 100 cents, plus all of the taxes on that dollar, including income tax and other employee taxes. For middle-class wage earner a post-tax dollar is worth about $1.40.
A pre-tax dollar on the other hand is money spent before taxes have been paid from that money. Small business owners can purchase many items with pre-tax dollars including, but not limited to health insurance, life insurance, cell phones, car payments, and meals. All of these items can be purchased by their small business instead of the individual’s personal income.
This strategy will reduce both the business tax and the individual tax. In turn this allows the individual keep much more of their money in real dollars compared to having a high paycheck and then having lots of expenses which quickly takes that money away.