Is there an equivalency betweeen Self-E and W2 yearly income?
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    Default Is there an equivalency betweeen Self-E and W2 yearly income?

    I know there is no one answer, but have y'all that have both worked for a company and worked for yourself (or small biz) found that X amount of money from one roughly equals out to Y amount from the other to Keep the SAME Lifestyle (relatively). This is really in regards to how much you pay yourself, for me it would be like Family Operating Income.

    My first thought is that you must make more as a small business owner, (say 30%) because your health care is higher and maybe self employment tax.

    My second thought was that you can do the same with less, since a lot your expenses could be shared with the business (maybe like cell phones and stuff, or your wife or kids can be "employees") thus bringing down your Taxable Income and keeping a bigger portion of your Gross.

    Yes, I know my tax guy would be the best to talk to but this is just part of my research process. I thought someone would be willing to share.

    By lifestyle, I just mean typical family stuff. Average car, maybe a yearly vacation, shoes and field trips for the kids, eat out every once in a while.

    Those that have made the transition, did you maybe notice that you were pulling in "X" on your W2 and now you show "Y" without a major impact?

    I hope this isn't a dumb question. And talking to a tax guy is the next step. I want to get some of my general concepts straight so I am at least not in left field when I start extrapolating where the (theoretical) money needs to be divided up.

    Thanks

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    It's impossible to say. Many small business owners will struggle to maintain their lifestyle because the kind of people who tend to start a business are also the kind of people who tend to be well paid as employees. It's very difficult to make a lot of money as a small business, especially a one man band. It's just the economy of scale, or lack thereof. A one man band has to do all the paper work, sales, marketing, procurement, packaging, shipping, cleaning, maintenance, etc. Plus he has to do the actual work.

    If the company has 5 employees, those tasks can be delegated and the efficiency gains can be pretty large. Let's say the overhead for a one man company is 40% of gross sales. The overhead for a 6 man company might be 20% per employee of gross sales.

    This is why the one man band must, at all cost, maintain low overhead. If you want to borrow a bunch of money and buy the latest and greatest, you will likely need to find a ton of work and hire some help.

    I guess my point is that if you are a skilled employee making $60-100,000 per year working 50 hours a week, you will have a really hard time keeping $30-50,000 of your gross sales as a one man band even after 5 years in business. That's the price you pay for independence.

    The other factor is the working hours. When you are self employed, you can work 100 hours a week if you want. Theoretically you can make a lot of money that way. But, it's also possible to work 20 hours a week and make a lot less. When you are an employee, the company dictates your minimum and maximum hours. As an owner, it's on you.

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    Yes, Great points. ones that I am all too aware of.

    Maybe my focus on "self employed" was misleading. Actually being able to "make" a salary aside. I was trying to focus more on what you pay yourself. So lets say you or the business have absolutely no issue actually making the money.

    Do most small biz owners get away with paying themselves less or more to maintain lifestyle?

    Still a bad question?

    This is a generalization I know, but if the majority of those running their own show have a "good" tax guy, then they probably are taking "generally" the same deductions.

    EDIT: Put a different way, does small business income go farther than W2 income?

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    its complicated. as a small business (self employed) you pay both halves of the SS and Medicare- so you are paying 12% tax instead of 6% tax. But it depends on how you are set up business wise- I am an S corp, and that means the "company" pays half and I pay half. Health care payments and retirement plans are also usually somewhat deductible by certain types of business. And while you must pay yourself some salary, there are other ways to transfer the money between a business and its owner, from rents, to corporate profits, which are taxed lower. And many things can be business expenses, depending on your business- reference books, business trips, company trucks, etc. You need to do careful bookkeeping to make sure you dont deduct true personal expenses, but I would say you can probably live larger on the same gross income as a business as you do as an employee. You must, of course, gross enough to pay insurance, employee taxes, and overhead costs you dont have as an employee. But you also get the entire hourly billable amount to work with, whereas an employee might only get 30% of it.

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    Quote Originally Posted by vmipacman View Post
    Yes, Great points. ones that I am all too aware of.

    Maybe my focus on "self employed" was misleading. Actually being able to "make" a salary aside. I was trying to focus more on what you pay yourself. So lets say you or the business have absolutely no issue actually making the money.

    Do most small biz owners get away with paying themselves less or more to maintain lifestyle?

    Still a bad question?

    This is a generalization I know, but if the majority of those running their own show have a "good" tax guy, then they probably are taking "generally" the same deductions.

    EDIT: Put a different way, does small business income go farther than W2 income?
    Folks cannot really even DISCUSS these things. You don't go to the tax guru as the "next step". You need planning guidance right up front. Deep dive into books and regulations. Hire it done. Better yet BOTH.

    That ain't because the tax guru has "free get rich magic". It is to keep you away from taking a course of action out of ignorance and wish-for that puts one small you hard against a rather larger crowd of seriously experienced revenooers.

    They have almost unlimited ken and flexibility as to how business are structured and operated. Seen 'em all, and more than a few times, too. Each with rules according, as a result.

    The very LAST thing you ever want to do, however is to give them cause to believe that you are trying to "game" what are, after all, THEIR rules. "Get away with" is a bright red flag, and now you are on-record with Google and such already.

    Meanwhile, Wes is spot on as to how the "self employed" economics work. Even where there ARE NO applicable taxes at all, it remains a time-value and scale thing.

    Hong Kong can near-as-dammit fit that very low/no tax model, BTW. Still have paperwork. Just far less of it. Not a "cheap labour" thing. A no labour required at all one, rather.

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    Is my question really that confusing or borderline that it can't be discussed?

    I'm leading a lot but I was hoping to get a response more like this. "When I worked for the company my taxable income was 80K and I supported my family OK, now that I run a business I pay myself 60K and basically live the same. Nothing is illegal, everything is above board, etc."

    Or the opposite as it may be.

    I'm not asking for specifics. I'm not asking for anything illegal. I'm not asking for ways to game the system.

    Or maybe Ill just stop since it seems to be a bad question. sorry

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    The advice I have always given to someone who asks about starting a business and they never take, is before looking for equipment, housing, or anything else, take an accounting course. They almost always say they will just have an accountant do it. The problem is that you need to know why the accountant does something and how to configure your business. You also need to know how to talk to bankers. Don't think you can do it in plain English.

    Bill

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    Quote Originally Posted by 9100 View Post
    You also need to know how to talk to bankers. Don't think you can do it in plain English.

    Bill
    LOL! Those among us who've studied on it, aced the courses, applied it "in anger" for long years have EXACTLY the same view.

    Near as dammit impossible to get a trade or craft small biz person to understand.. "plain English".

    They know what they know, and YOU just MUST be the one totally ignorant of why "my business is different".

    And that with but three basic business models, planet-wide:

    Commerce - the creative one.

    Warfare - the destructive one.

    Government, other crime, and their related politico/religious movements - the parasitical one on both.

    How hard can that be?


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    Quote Originally Posted by vmipacman View Post
    Is my question really that confusing or borderline that it can't be discussed?

    I'm leading a lot but I was hoping to get a response more like this. "When I worked for the company my taxable income was 80K and I supported my family OK, now that I run a business I pay myself 60K and basically live the same. Nothing is illegal, everything is above board, etc."

    Or the opposite as it may be.

    I'm not asking for specifics. I'm not asking for anything illegal. I'm not asking for ways to game the system.

    Or maybe Ill just stop since it seems to be a bad question. sorry
    Not a bad question, just extremely complicated and NOT amenable to a simple answer—unless you would consider "Yes, I make 3X as much as my best year working for another company" a useful response.

    If you want simple, here it is: THE INCOME STILL HAS TO BE EARNED BEFORE YOU GET TO KEEP ANY OF IT. There are no accounting tricks that can circumvent that fact.

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    Quote Originally Posted by vmipacman View Post
    Is my question really that confusing or borderline that it can't be discussed?

    I'm leading a lot but I was hoping to get a response more like this. "When I worked for the company my taxable income was 80K and I supported my family OK, now that I run a business I pay myself 60K and basically live the same. Nothing is illegal, everything is above board, etc."

    Or the opposite as it may be.

    I'm not asking for specifics. I'm not asking for anything illegal. I'm not asking for ways to game the system.

    Or maybe Ill just stop since it seems to be a bad question. sorry
    Not so much "stop" as to go read, heed, and return with specific or TECHNICAL questions that can even BE answered.

    PM happens to have rather a substantial and highly expert contingent of Finance-savvy folk, seasoned business Managers, and successful entrepreneurs. Not limited to "small shops", either.

    That is mere fortuitous accident.

    Those are not the skills that brought us together here.

    All of those specialities of taxation, accounting, remuneration, business planning for strategy AND tactics have venues of their own. Ones not distracted by which vise to buy, how to mount it, or what tooling, feed, and DOC to use on whichever alloy is in it.

    If this venture is important to your life, last thing you need is to hope what amounts to "table scraps" from our many and varied "side" responsibilities will guide you safely. Shop planning and construction, use of floor space, appropriate MHE, distribution of power, selection of the means of production, tooling costs, QA/QC - useful place to come.

    Business generalization? Too general. Too early. Only if you can pose an answerable question.

    Fine details of financial planning? Only now and then.

    "Find the experts" instead. Those whose "Day Job" it is to manage exotic information for YOUR eyes, not those who must hold close what THEY do.

    We mostly mangle mundane matter, and yet even then - our processes and methods are far from 100% suited for sharing. Some among us compete - and hard - with others.

    Meanwhile a "freebie".

    Taxation authorities, US IRS high on the list, long ago granted themselves the right to tax a person on the amount the IRS considers their duties should entitled them to, arm's length, free local market. Body's Corporate can overpay for an Executive's services to an absolutely INSANE degree, and far too many do.

    The other side of that coin-of-the-realm can hurt worse. "Pay" yourself too LITTLE, and it has happened that the IRS decides to tax you on a far higher amount you "should have been entitled to".

    And you don't even have the money in hand to pay that tax.

    It had already purchased better machine-tools - in hopes your retirement would eventually be the better for it.

    Retired from Finance. Need an expert? I am no longer he.

    I, too, now use a much younger CPA who still is !!!

    Didja know that the US Congress averages about three changes a day to the tax code? And then there are State and local bodies putting their oar in?

    High-level Bean Counting is largely about keeping current with those changes - IRS staff the most hard hit of all. They have to find a way to explain insanity, then collect on it, and with far too meagre a budget for it to boot.

    Caught in the middle as they are, it is no damned wonder the IRS can get cranky.

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    In the simplest form, if you take an hourly job as an employee and turn it into the exact same job as a consultant, double the pay rate to break even.

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    Quote Originally Posted by vmipacman View Post
    I know there is no one answer, but have y'all that have both worked for a company and worked for yourself (or small biz) found that X amount of money from one roughly equals out to Y amount from the other to Keep the SAME Lifestyle (relatively). This is really in regards to how much you pay yourself, for me it would be like Family Operating Income.

    My first thought is that you must make more as a small business owner, (say 30%) because your health care is higher and maybe self employment tax.

    My second thought was that you can do the same with less, since a lot your expenses could be shared with the business (maybe like cell phones and stuff, or your wife or kids can be "employees") thus bringing down your Taxable Income and keeping a bigger portion of your Gross.

    Yes, I know my tax guy would be the best to talk to but this is just part of my research process. I thought someone would be willing to share.

    By lifestyle, I just mean typical family stuff. Average car, maybe a yearly vacation, shoes and field trips for the kids, eat out every once in a while.

    Those that have made the transition, did you maybe notice that you were pulling in "X" on your W2 and now you show "Y" without a major impact?

    I hope this isn't a dumb question. And talking to a tax guy is the next step. I want to get some of my general concepts straight so I am at least not in left field when I start extrapolating where the (theoretical) money needs to be divided up.

    Thanks

    1) Employee gross pay incl benefits + 7.5% (?) for the S/S tax that they are paying and does NOT show up on your income anywhere = what you would need to produce on your own. Plus the difference in what it would cost you as a solo artist to fetch those same benefits. (You are not likely going to get the same insurance for the same $ as a single buyer.)

    On the other hand, if you are generally healthy and you opt to only purchase catastrophic ins, then you may squeeze in a little under? We have only bought Catastrophic ins, and we are still on a grandfather plan that you can't buy anymore, so I don't even know if you can find any of those anymore since Obama?


    2) Family being "employees". I don't see what diff that makes - other than child labor laws don't apply if their your own kids. (in Ohio anyhow) Your kids can work in the shop and on actual cutting machines before being 18.

    The cell phone thing - yeah, sure, not like that's a big deal, but ....

    But if you pay your family employee (wife) you will need to pay your 1/2 of S/S, and then she will still hafta pay income tax. I think that the only place this will help you is if you want to give your kid some $ (whether he earns it or not) and you can deduct it. The kid will hafta pay S/S on it maybe? But not income tax? (something like that)

    3) You can set your own hours - yes. If something comes up, bla bla, but in reality, you will be at the shop more than you are at work now.

    4) Sure, I (eventually) saw a significant uptick in $. My last job I made $20K with oodles of O/T. And I doo mean oodles. Much of the reason that I left = wasn't getting the $. Also - this was 30 yrs ago.

    I didn't make any more, if as much for a few years, but by ??? 7 years later I was getting where I should be. Fortunate for me I started young, before I ever made any $ anywhere to speak of, so those first years weren't any big deal. I am glad that I did it, but I wouldn't want to hafta doo it aggin. (But then I don't want to go back and doo ANYTHING over!)


    ---------------------

    Think Snow Eh!
    Ox

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    Quote Originally Posted by vmipacman View Post
    I'm not asking for specifics. I'm not asking for anything illegal. I'm not asking for ways to game the system.

    Or maybe Ill just stop since it seems to be a bad question. sorry
    It's not a bad question ... short answer, for me anyway, was : I made less money (after paying the bills) but was able to keep more of it (most small business expenses can be deducted from the gross). Since my interest was in machining, it was more like the hobby paying for itself than anything else.

    I would say that small businesses are really a hobby that supports a person. That's not meant to be critical, that's what life is really about, not building empires. Places like GE are a different animal.

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    Quote Originally Posted by SeaMoss View Post
    I would say that small businesses are really a hobby that supports a person. That's not meant to be critical, that's what life is really about, not building empires.
    Pity that "vocation" and "avocation" are so often viewed as opposite and exclusionary rather than mere nuances of style.


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