One of the main reasons a person decides to start a business for themselves is so that they can earn more money than as an employee at their current job. Yes, being your own boss, having more flexibility over time, and having better tax advantages are other good reasons, for many it boils down to being the owner means you (should) make the most money.
Everybody wants to make six figures. That is a very good business world. In a decade or so, even a high five-figure income could be the definition of poverty level. But making money is one thing and keeping it is another. Here are some suggestions to help you keep more of your money.
The first element that you must take into account is where the tax brackets begin. In some cases, earning 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, the taxes due to the IRS would be approximately $53,200 and you would get a net $136,800. If he could just work a little harder, get something over time, he could make an extra $1,000. This would bring his total annual salary to $191,000 and add 5% more to his tax bracket, bringing it to 33%. This equates to $63,030 in taxes owed and a net of $127,970. In this example, by earning an additional $1,000 and moving into the next tax bracket, you would end up with $8,830 less.
So, by earning an income that puts you right in the next tax bracket, you could actually lose more money at the end of the year, without being able to keep more for yourself.
The next item, or set of items, is to look at the kinds of things you currently buy with after-tax dollars versus pre-tax dollars. An after-tax dollar is a dollar, 100 cents, plus all taxes on that dollar, including income tax and other employee taxes. For a middle-class wage earner, an after-tax dollar is worth about $1.40.
A pre-tax dollar, on the other hand, is money spent before taxes on that money have been paid. 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 groceries. All of these items can be purchased by your small business rather than the individual’s personal income.
This strategy will reduce both the business tax and the individual tax. In turn, this allows the person to keep much more of their money in real dollars compared to having a big paycheck and then having a lot of expenses that quickly drain that money away.
