Remember graduating and thinking, “now I’m going to make the big bucks”? Only to get your first paycheck and realize that Uncle Sam (or Uncle Scam as I like to call him) has taken 1/3 of your hard-earned money.
Of the two greatest expenses we have in life — taxes and the interest expense on debt — the first you have either a whole bunch of control over OR no control over, depending on how you choose to be paid.
How you choose to be paid is a tad misleading… if you are working for a company, you will more than likely be paid as a W2 employee. W2 employees fill out a W4 form that lists their dependents, how much should be held back for taxes, and if they are tax exempt. As a standard rule of thumb, the fewer dependents you list on your W4 form, the MORE taxes Uncle Scam will pull out. If you have very few deductions when filling out your tax return, you might get a little (or a lot) back as a refund. If you have plenty of deductions (things like mortgage interest, student loan interest, non-reimbursable travel expenses for work, etc.) then you’re going to be looking at a pretty substantial refund.
For someone with lots of dependents, the amount of money that’s held back for personal taxes is considerably less. At the end of the year, if they’ve planned properly, they’ll owe little to no money in taxes. They probably won’t get much back either.
So what’s a person to do to maximize their income earned?
For starters, consider doing work as an independent contractor where you’re paid whatever amount you agree upon with no taxes taken out. At the end of the year you’ll receive a 1099 listing the amount you made and it will be up to you to cover the taxes due. Keep in mind you may be on the hook for self-employment taxes which can take a bite out of your overall income (if not planned properly).
If that seems a bit daunting, the key is educating yourself about what can be written off and what can’t. A major turning point in my life when it came to working for myself or working for someone else was finding a mentor in the tax world. For the past 15 years I’ve been working with an absolute tax-master. He’s completed tens of thousands of tax returns in the past 40 years, but probably more impressive is the fact that when a tax law changes, he dives headlong into the changes to see how it will effect his clients.
What I’ve learned in my years of working with this professional is the deeper your understanding of the system, the more ways of minimizing your overall liability there are. We’re not talking about *shirking* the system, but about legally setting up your affairs so that you pay the least amount necessary. For the record, I’m all about paying every dime that I legally owe, but not one red cent more.
The key word to pull from the previous paragraph is learned. You can’t just know this stuff like some people realize they can play music by ear. It’s learned, oftentimes through trial and error, making mistakes, attending conferences, and hanging out with wickedly smart entrepreneurs, tax planners, and accountants.
Are they dry? Sometimes.
Are they money savvy? Always.
While I would never blindly steer someone into working for themselves, I can honestly say that making the leap for me from a corporate soldier to an entrepreneur was one of the most challenging and rewarding things I’ve ever done.
For a great resource to learn more about keeping more of the money you make, check out this book by Robert Kiyosaki and his advisors.