In these recent posts, I’ve been exploring ways in which you can fix the leaks in your financial bucket and improve your cash flow without scrimping. In my previous post, I suggested that you incorporate your business, in order to improve your tax advantages.
If you already have an entity established, you can probably still save money in taxes. As my 5 Day Weekend collaborator Garrett Gunderson has found, 93% of entrepreneurs are overpaying taxes by not taking advantage of the right rules.
For example, many business owners can cut their current tax bill in half with one simple fix. Business owners put in a lot of time working in their business, such as working with clients, treating patients, or dealing with customers. The government considers money made from these activities to be “earned income,” which is taxed at your normal tax rate. Currently, if you take home more than $117,000 a year in the U.S., the IRS takes 39.5% of every dollar you make over that amount. And beyond that, there’s potentially a 15.3% self-employment tax if you aren’t differentiating your income and set up with the right corporate structure. (This information is accurate as of writing this. As with health insurance, tax codes often change.)
One little-known provision in the tax code lets you legally pay 15.3% less on your income. The IRS treats investment income (like stock dividends or rental income) differently. Unlike earned income, this money is not taxed at the additional 15.3%. It’s actually the perfect strategy for small business owners that big businesses don’t even get to use. The IRS considers the time you spend working on your business to be an investment. So the IRS taxes any money you make during that time as a dividend. This can make a huge difference to your bottom-line profits.
There are certain rules about this, and you need to make sure you do it right. And this just one of at least 40 other high-impact tax strategies I use and recommend. A qualified professional who knows these rules can reduce your tax burden substantially.
In my next post, I’ll explore the benefits of analyzing your investments for hidden fees, in order to see where you’re leaking money. In the meantime, I’d love to hear from you. Are you working with a good CPA who can get you the best tax advantages? Whether as an employee or entrepreneur? Thank you for sharing.
Secure your copy of the “5 Day Weekend” book. 5 Day Weekend: Freedom to Make Your Life and Work Rich with Purpose [Nik Halik & Garrett Gunderson]