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If you set the entity up correctly and work with a decent accountant, your $112k turns into more like $40k taxable, and if you are married, that $40k drops to $
by jermaustin1 6y ago
If you set the entity up correctly and work with a decent accountant, your $112k turns into more like $40k taxable, and if you are married, that $40k drops to $20k @ 10% + $20k @ 12% or ~ $4500 in taxes.
- komali2 6y agoThis is news to me so I'm just saying, if you wrote about this in more detail, I'd read the shit out of it.
- bklyn11201 6y agoI think what he's generally saying: aggressively deduct expenses used to support your business. This would include rent, home office, computers, phones to conduct business, business meetings, travel, health insurance, retirement, etc. Then the member and spouse would draw low salaries putting you in low income bracket and thus low taxation. The 2017 TCJA further reduced taxation for business owners via the Qualified Business Income (QBI 20%) deduction.
- jldugger 6y agoI suspect a large part of it is a SEP IRA which lets you pack away like 57k in a tax advantaged account. Business deductions are almost like icing on the cake vs that.
- redisman 6y agoDeductions sound good to people who haven't actually run a business or thought very hard about it. You have to be purchasing stuff to deduct. As a software engineer why not just not buy stuff since all you really need is a computer. Then you keep 100% of that money rather than 10%. Some outliers are home office and utilities and things like that.
- snowwrestler 6y agoThe attraction of deductions for sole proprietors working from home is not buying new stuff, it is the opportunity to pay for stuff you would buy anyway with pre-tax dollars.
- distances 6y agoIn lots of countries you definitely can't deduct rent, non-business travel, health insurance, or retirement. And home office only if you have a dedicated room for it. I'm freelancing currently myself, and available deductions are honestly miniscule and well-defined.
- jermaustin1 6y ago> draw low salaries The IRS has rules (typically unenforced) regarding this. You are supposed to draw a salary that matches your job in your local area. So if you are based in Tinyton, Flyover State, you could probably get away with paying yourself $30k/yr, but in NYC (where I'm based), my accountant told me $70/hr is basically as low as I can safely go. So I do $70/hr and then $14/hr in my retirement account. The $70 turns into ~$78 after all the employer taxes add into it, and I take home only $52 after employee side of taxes are taken out of it.
- komali2 6y ago> safely What's the risk - audit? And if so, what's the risk from the audit? A fine for tax fraud? Jail time?
- HeyLaughingBoy 6y agoIRS Publication 334: https://www.irs.gov/publications/p334/index.html https://www.irs.gov/publications/p334/index.html It's actually a very interesting little booklet.
- hanniabu 6y agoWhat in the world....mind sharing tips or any links where I can learn more about this?
- propogandist 6y agotax laws change routinely, so you'd be best off consulting an accountant somewhat relevant reading on what can be done if you're well versed with tax laws: https://scottestill.com/buy-new-used-car-2018-get-100-tax-deduction/ https://scottestill.com/buy-new-used-car-2018-get-100-tax-de... Surprisingly, this dealer has an entire page dedicated to it this, and why you should buy one of their SUVs: https://www.landroverhuntvalley.com/business-tax-advantage.htm https://www.landroverhuntvalley.com/business-tax-advantage.h...
- andrewzah 6y agoGet a good accountant. They are seriously worth it.
- jermaustin1 6y agoThis advice is invaluable. I only pay my accountant around $2000 to handle a bunch of housekeeping at the end of the year that I'm to lazy to do during, and to file my taxes. For years I did my own taxes using Turbo Tax Self Employed and Turbo Tax Business Editions, but in 2016 I decided to outsource all of that headache, the first year, my taxes were half of what they were the year before with similar income. Then after the TCJA in 2017, my taxes were only 1/5th what they had been before the accountant, with close to double the raw income. The biggest changes from doing it myself: I got an accountant; I incorporated (s-corp) instead of doing self-employment income; I draw W2 income now (using Gusto); I set up a SEP-IRA and put 20% of my W2 earnings as an automatic debit from my business account (in Vanguard); TCJA chops off 20% of my distributions on my K1; and I'll state again, I hired an accountant.
- hanniabu 6y agoAny advice on how to hire a good accountant vs one that just talk so they can charge a lot?
- aj7 6y agoAha. And now you understand why we don’t have universal healthcare, crumbling infrastructure, and so much cash in the hands of the wealthy that interest rates are near zero.
- mullen 6y agoI would like to point out that Universal Healthcare would be funded by a separate tax and probably would not come out of Income Taxes.
- jermaustin1 6y agoI believe this is how the UK does it as well. You pay income tax, then you pay your NHS fee.
- aphexairlines 6y agothe NHS is mostly funded from general taxation https://www.kingsfund.org.uk/projects/nhs-in-a-nutshell/how-nhs-funded https://www.kingsfund.org.uk/projects/nhs-in-a-nutshell/how-...
- mattlondon 6y agoWe pay a "national insurance" tax in addition to income tax, but this is mainly to cover the state pension from what I understand and maternity allowance etc. As I understand it, NHS comes from general taxation. Obviously there is no actual "fee" to use the NHS at the point of use - it is all free apart from prescriptions which are the same price regardless of what you get (and you might get it for free anyway depending on your circumstances)
- nbaksalyar 6y agoPrescriptions are also completely free in Scotland. Same for Wales and Northern Ireland, as far as I know.
- caymanjim 6y ago
- avgDev 6y agoThis. In US there are many benefits of owning a business. Cars are an expense, home office is an expense, etc. When you work for someone else you don't have this flexibility but your risk is lower and you are not worried about finding clients.
- balls187 6y agoIts difficult to deduct cars as an expense--that is one of many expenses that the IRS will scrutinize. The broader point still remains, for a business (a 1099 is considered a sole-proprietorship) generally net income is taxed, and as a W2, your taxes are witheld per pay period.
- bnastic 6y agoSame in the UK, and I believe in other countries, it's not strictly a US thing.
- bluekite2000 6y agoWhat do you mean set up correctly? And how does 112K turn into 40K taxable?
- jermaustin1 6y agoI'm not an accountant or tax lawyer, so this isn't advise, only my back of the envelope calculation, not even using things like the 172 deduction, or business expenses, but my estimate was actually way off almost double. Gross Income: $112k - SEP IRA 25%: -$28k - Owner Health Insurance: -$15k - 199-A Deduction (20%): -$12k Total business income for taxes: $47k - Married Filing Jointly Deduction: -$24k - Total taxable income: $23k Tax on $23k (10% of first $20k, 12% of next $3k): $2360
- bluekite2000 6y agoDo you use a service for bookkeeping?
- jermaustin1 6y agoI do not. Bookkeeping for a small business really doesn't take much time. I spend about 2 hours a month working the books, then come January, I have my accountant's clerk come back and do a final pass over everything to prep for taxes.
- mNovak 6y agoWith S-corps you do have to actually pay yourself wages, thus incurring some FICA taxes. Rule of thumb I believe is 50% of net income, up to ~$100k. Given that, you can then also contribute (and deduct) as the company up to 25% of salary towards 401k Another gem many people don't know about is "Increasing Research Activities", for certain industries this essentially translates to 5-10% of your total payroll becoming a credit. That's huge.
- jermaustin1 6y agoI was doing my estimation based on an LLC, since most people don't set up S-Corps. I do operate through as an S-Corp, and I pay myself ~60%, and put 20% into my SEP-IRA.