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.
Aha. 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.
This is sorta already how it is in the US. While we obviously don't have universal healthcare, or a national pension, we do have Medicare/Medicaid and Social Security. These are separate than income tax. On your pay stub, it's the FICA ("Federal Insurance Contributions Act") deduction. There is also a smaller separate supplemental Medicare-specific tax. Federal income tax is a separate deduction.
We 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)
I 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.
I 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.
Deductions 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.
The 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.
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.
In 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.
This. 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.
Its 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.
I'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
With 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.
I 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.
WTF? Who pays $15k PER YEAR for health insurance? That's nuts. In most countries USD$15k would pay for healthcare for 2 or 3 people for their entire lives.
$15k is a cheap family policy in most of the country. My wife and I pay $24k/year for the cheapest silver option with a low deductible. My wife gets pneumonia and bronchitis almost annually, and every few years gets hospitalized. On top of that, she has 5 medications she takes for her asthma and allergies that without insurance would add up to almost $1000/mo, so sure we could go uninsured and save close to $12k/year, but the second she gets pneumonia and ends up in urgent care or the ER, we've lost all of the savings. And that is just her, I have to get my blood drawn quarterly for a thyroid condition, and each time they bill that to the insurance it's $1600.
So sure $15k is ridiculous to pay for health insurance, but in the US, its the cheap option for a family.
That’s actually fairly “cheap”, if it’s covering more than one person.
For a brief period I lived in Virginia and had no medical coverage through my employer. The legal minimum coverage was $1,400 / month for my family of four... and it was basically worthless; I would have had to have paid out something like $40k in a single year for medical services before I would have broken even.
I'm privy to my company's books to see the employee cost (free for the employee, usually ~$150/month to cover their family as well) as well as the total cost for all of our employees across several states. We have very high quality insurance as standard, and the full coverage plans are more like $20k - $25k/year. It's completely out of control.
I 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.
Many expenses related to the operation of the business become tax deductible. At minimum, that usually includes internet access, hardware/software upgrades, and potentially some % of your living space dedicated to the business. If you do it properly (usually via documentation), you can often include miles driven to meetings, professional travel, meals with customers, prospects, and contractors, and a ton of other things.
And still none of that considers things like Simplified Employee Pension Plan (SEP), health insurance, home maintenance, etc, etc.
The list can go on and on depending on the type of your business, jurisdiction, and supporting documentation.
* Talk to someone about your local tax rules before taking action.
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.
I hear this advice a lot, but what does an accountant actually do differently? It always sounds magical. Are there super secret deductions and credits that aren't on Turbo Tax, and only accountants know about?
I feel like I'm doing 90% of the work already, having organized all my expenses and income. What are they doing other than typing it into their own Turbo-Tax-equivalent?
“TurboTax will take what I did last year and minimize my taxes. My accountant will tell me what to do differently this year to minimize my taxes next year.”
In other words a good accountant is a forward-looking advisor, not just a calculator.
