7 ms·

I imagine your taxes are fairly straightforward as a result. Have you considered spending $X,000 on an accountant to see if there are ways of structuring your i

by biot 10y ago

I imagine your taxes are fairly straightforward as a result. Have you considered spending $X,000 on an accountant to see if there are ways of structuring your income to minimize taxes?

idlewords 10y ago
Structuring income to avoid taxes seems like a jerk move to me. But a bigger reason is that as long as my income is over some threshold, I'm happy. Dealing with business minutia reduces my happiness, so I avoid doing it.
- arkitaip 10y ago
  I have no business telling you how to run your life but you would be surprised how much an accountant can help you in totally legal and ethical ways.
- nodamage 10y ago
  I hope you are at least contributing to a tax-deferred retirement account? A solo-401k is a very good option for solo entrepreneurs, and I'd be surprised if anyone considered it a bad thing to take advantage of.
  - idlewords 10y ago
    Oh, yeah. I do it every night right after I floss.
- cityzen 10y ago
  avoiding taxes vs. running your business in a way that is fully legal that allows you to not be penalized for being self employed are two different things. For example, if you paid 30% (self employment tax, roughly) on 250k, you're paying $75k in taxes. If you set yourself up as an LLC filing as an S-corp which brings zero minutia with it beyond the setup, you could pay yourself a salary of, say, $80k, pay your $12k in taxes and the other $170k would be taxed at 15%, saving you roughly $37,000 in taxes. Putting $37k a year into a retirement account and investments wouldn't be so bad.
  - nodamage 10y ago
    > the other $170k would be taxed at 15% Huh? Where did you get 15% from? The other $170k would be taxed at ordinary income rates, so most of that income would fall in the 28% or 33% bracket.
  - elsewhen 10y ago
    self-employment taxes are only applied to a capped part of your profits ($118,500 in 2015) [0] s-corp distributions are taxed as ordinary income (not capital gains) [1] even though long term capital gains rates don't apply in this case, you cited an incorrect number. they peak at 23.8% not 15% [2] [0] https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes https://www.irs.gov/businesses/small-businesses-self-employe... [1] https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/How-an-S-Corp-Can-Reduce-Your-Self-Employment-Taxes/INF22938.html https://turbotax.intuit.com/tax-tools/tax-tips/Small-Busines... [2] http://www.taxpolicycenter.org/briefing-book/how-are-capital-gains-taxed http://www.taxpolicycenter.org/briefing-book/how-are-capital...
    - cityzen 10y ago
      Fair enough. I'm not an attorney or an accountant and the comparison of tax liability for self employment vs. LLC filing as an s-corp may or may not be significant. It really depends on each person's situation in terms of income, expenses, etc.
      - idlewords 10y ago
        You're not an attorney or an accountant, but you're posting incorrect tax advice on public forums. Staahp.
        cityzen 10y ago
        you got me!
  - ryanwaggoner 10y ago
- charlesdm 10y ago
  Two things: 1. Personal experience: businesses and products don't always last. Your product that is pulling in great money might last, or it might not. You could be down to $100k next year, or 50k, or $0. Tech moves fast. You are almost certainly overpaying taxes significantly, say, $50k+ a year. I've had a product that pulled in $100k a year for many years on autopilot, and it just died one year. 2. $50k a year could be invested and compounded annually for many many years. Life isn't about income, it's about net worth. Having a higher net worth is like borrowing years from the future. You don't need to (just) build income, you need to build up net worth and income from different sources. That will allow you to build a new product, or just keep enjoying life once your income stream shuts down. Maybe I'm a jerk for minimising my taxes, but I'd prefer more money in the bank now vs later.
  - ryanwaggoner 10y ago
    Assuming he's deducting expenses, I'd love to hear the magic method that will save him $50k on taxes. Solo 401k is likely the biggest potential savings and that would save (defer actually) less than half that. At his income level, the S-corp salary/distributions split is either risky or not very big. Might save $5k-10k. Any more than that and you're really just asking for an audit.
    - charlesdm 10y ago
      I was basing that assumption off of what he wrote in a post above: "I pay about $1.5k/month for colocation and the amortized cost of hardware, and that's the major expense.". He's probably not claiming every deduction he can. I'm not US based, but given he does everything himself there's no reason to assume he has everything optimised. Every country is different, but most tend to have similar tax concepts to some extent. I'm based in Belgium, and if I wouldn't optimise anything on $200k income, I'd be paying close to 50% tax. If you do, you can comfortably get away with legally only paying a fraction of that, say, 15-20%, if not less. His easiest way to save on income tax would probably just be to sell his business / product, so that he can book a capital gain. Capital gains are taxed lower than income. But that isn't exactly an optimisation unless the difference is significant enough. Definitely worth doing if you don't see it growing much from this point though, or if you're bored with it. That capital (for a business doing $225k a year in profit, maybe $500-650k after tax?) can then be reinvested tomorrow in other assets generating capital income, i.e. stocks, which is preferred to income taxable at income tax rates.

by biot 10y ago

I imagine your taxes are fairly straightforward as a result. Have you considered spending $X,000 on an accountant to see if there are ways of structuring your income to minimize taxes?

idlewords 10y ago

Structuring income to avoid taxes seems like a jerk move to me. But a bigger reason is that as long as my income is over some threshold, I'm happy. Dealing with business minutia reduces my happiness, so I avoid doing it.

arkitaip 10y ago
I have no business telling you how to run your life but you would be surprised how much an accountant can help you in totally legal and ethical ways.
nodamage 10y ago
I hope you are at least contributing to a tax-deferred retirement account? A solo-401k is a very good option for solo entrepreneurs, and I'd be surprised if anyone considered it a bad thing to take advantage of.
- idlewords 10y ago
  Oh, yeah. I do it every night right after I floss.
cityzen 10y ago
avoiding taxes vs. running your business in a way that is fully legal that allows you to not be penalized for being self employed are two different things. For example, if you paid 30% (self employment tax, roughly) on 250k, you're paying $75k in taxes. If you set yourself up as an LLC filing as an S-corp which brings zero minutia with it beyond the setup, you could pay yourself a salary of, say, $80k, pay your $12k in taxes and the other $170k would be taxed at 15%, saving you roughly $37,000 in taxes. Putting $37k a year into a retirement account and investments wouldn't be so bad.
- nodamage 10y ago
  > the other $170k would be taxed at 15% Huh? Where did you get 15% from? The other $170k would be taxed at ordinary income rates, so most of that income would fall in the 28% or 33% bracket.
- elsewhen 10y ago
  self-employment taxes are only applied to a capped part of your profits ($118,500 in 2015) [0] s-corp distributions are taxed as ordinary income (not capital gains) [1] even though long term capital gains rates don't apply in this case, you cited an incorrect number. they peak at 23.8% not 15% [2] [0] https://www.irs.gov/businesses/small-businesses-self-employed/self-employment-tax-social-security-and-medicare-taxes https://www.irs.gov/businesses/small-businesses-self-employe... [1] https://turbotax.intuit.com/tax-tools/tax-tips/Small-Business-Taxes/How-an-S-Corp-Can-Reduce-Your-Self-Employment-Taxes/INF22938.html https://turbotax.intuit.com/tax-tools/tax-tips/Small-Busines... [2] http://www.taxpolicycenter.org/briefing-book/how-are-capital-gains-taxed http://www.taxpolicycenter.org/briefing-book/how-are-capital...
  - cityzen 10y ago
    Fair enough. I'm not an attorney or an accountant and the comparison of tax liability for self employment vs. LLC filing as an s-corp may or may not be significant. It really depends on each person's situation in terms of income, expenses, etc.
    - idlewords 10y ago
      You're not an attorney or an accountant, but you're posting incorrect tax advice on public forums. Staahp.
      - cityzen 10y ago
        you got me!
- ryanwaggoner 10y ago
charlesdm 10y ago
Two things: 1. Personal experience: businesses and products don't always last. Your product that is pulling in great money might last, or it might not. You could be down to $100k next year, or 50k, or $0. Tech moves fast. You are almost certainly overpaying taxes significantly, say, $50k+ a year. I've had a product that pulled in $100k a year for many years on autopilot, and it just died one year. 2. $50k a year could be invested and compounded annually for many many years. Life isn't about income, it's about net worth. Having a higher net worth is like borrowing years from the future. You don't need to (just) build income, you need to build up net worth and income from different sources. That will allow you to build a new product, or just keep enjoying life once your income stream shuts down. Maybe I'm a jerk for minimising my taxes, but I'd prefer more money in the bank now vs later.
- ryanwaggoner 10y ago
  Assuming he's deducting expenses, I'd love to hear the magic method that will save him $50k on taxes. Solo 401k is likely the biggest potential savings and that would save (defer actually) less than half that. At his income level, the S-corp salary/distributions split is either risky or not very big. Might save $5k-10k. Any more than that and you're really just asking for an audit.
  - charlesdm 10y ago
    I was basing that assumption off of what he wrote in a post above: "I pay about $1.5k/month for colocation and the amortized cost of hardware, and that's the major expense.". He's probably not claiming every deduction he can. I'm not US based, but given he does everything himself there's no reason to assume he has everything optimised. Every country is different, but most tend to have similar tax concepts to some extent. I'm based in Belgium, and if I wouldn't optimise anything on $200k income, I'd be paying close to 50% tax. If you do, you can comfortably get away with legally only paying a fraction of that, say, 15-20%, if not less. His easiest way to save on income tax would probably just be to sell his business / product, so that he can book a capital gain. Capital gains are taxed lower than income. But that isn't exactly an optimisation unless the difference is significant enough. Definitely worth doing if you don't see it growing much from this point though, or if you're bored with it. That capital (for a business doing $225k a year in profit, maybe $500-650k after tax?) can then be reinvested tomorrow in other assets generating capital income, i.e. stocks, which is preferred to income taxable at income tax rates.