March 2009

Think making lots of money will make you rich?

Think again.

Most people focus on making a lot of money…at the expense of paying a lot in taxes.  Let’s look at the different tax structures and understand how they impact your bottom line.

I will do my best to keep it relatively simple.

NOTE: I am not an accountant.  Seek professional advice.

Taxes

There are different kinds of taxes depending upon whether you are an employee, self-employed, a business owner, or an investor.

To put it simply…

Earn —> Get Taxed —> Spend whatever’s left over

Earn —> Spend for Business Expenses —> Get Taxed on whatever’s left

If you want to dive more into the nitty-gritty, here is some more detailed info:

• Employees
  • 10-35% Earned Income Tax (this is the range for 2008 depending on income and your filing status)
    • Reference: 2008 Tax Rate Schedule
  • 6.2% Social Security Tax (FICA)
    • Reference: 2008 Social Security (FICA) Tax
  • 1.45% Medicare Tax
    • Reference: 2008 Medicare Tax
  • State Tax (depending on your state)

• Self-Employed
  • Self-Employment Tax
  • 12.4% Social Security Tax
  • 2.9% Medicare Tax
  • State Tax (depending on your state)

• Business Owner (depends on structure of the company)
  • Corporate Taxes
  • 6.2-12.4% Social Security Tax
  • 1.45-2.90% Medicare Tax
  • State Taxes
• Investor
  • 15-30% Capital Gains Tax (depending on short and/or long-term capital gains)
  • 0% Real Estate Income (using 1031 tax-deferred exchanges and pulling your equity out: the equity is a loan, not income)
  • Depreciation Expenses

Real World Examples

Let’s look at two people, one an employee and one a business owner.

Note: Examples used for illustration purposes only.

Employee: Mike, a janitor			Business Owner: Pam, a payroll clerk
Total Earnings	$ 24,000.00		Total Earnings	$ 24,000.00
Earned Income Tax	$ 4,402.50		Business Expenses	$ 7,000.00
Social Security (FICA)	$ 1,536.00		Total Income	$ 17,000.00
Medicare	$ 348.00		Earned Income Tax	$ 3,352.50
State Tax (5.3% used)	$ 1,272.00		Social Security (FICA)	$ 217.60
Net Income	$ 16,441.50		Medicare	$ 493.00
			State Tax (5.3% used)	$ 901.00
			Net Income	$ 12,035.90
Total Taxes Paid	$ 7,558.50		Total Taxes Paid	$ 4,964.10

Can you see why it may be more beneficial to be a business owner or an investor than an employee?

Stop taxes from eating your income…consider starting a corporation today.

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