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)
- 10-35% Earned Income Tax (this is the range for 2008 depending on income and your filing status)
- 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.