WHEN are you taxed?

"The difference between death and taxes is death doesn't get worse every time Congress meets."
~Will Rogers

One might easily say “always” but this is not quite true.  For starters, you are probably used to pay taxes “right away” if you get a paycheck.  Before you can even SPEND your paycheck, federal, state, local and FICA taxes are automatically taken out.

Do you want to earn money, spend then pay taxes?  Or do you want to continue to earn money, pay taxes and then spend what is left over?

Very simply speaking if you are an employee you earn money, taxes are taken out before you even get to spend your paycheck.  Now yes, depending on your tax situation, you may get a refund come April 15th.  However, all a refund means is that you overpaid in taxes!  And does Uncle Sam pay you back with interest for using that money?  Nope.

But what if you own a business or are self-employed?  Well in many cases, you can get paid in full first, then spend money on qualified business expenses and THEN pay taxes on what is left over.

Let’s say you earn $60,000 gross a year.  Just on federal income and FICA taxes, your take home pay would be about $47,000.  THEN you can spend what’s left over.

Now this will be a stretch but stay with me.  Let’s say your annual expenses equal $47,188.  So in one year, 21.35% of your pay went to taxes, 78.65% went to expenses.

For example, let us say you are a business that earns $60,000 a year.  Now as a business generally speaking you get to earn, spend and THEN pay taxes.  So $60,000 - $47,188 = $12,812.  As of 2020, the business tax rate is a flat 21%.  21% of $12,812 = $2,690.52.  In this instance, 4.48% of the business’ earnings went to taxes, $47,188 went to expenses and you are LEFT with $10,121.48 versus $0.

Keep in mind, this is VERY simplified.  Not every expense is tax deductible (which we will get to later) and every person’s tax situation is different.  But if you can wrap your head around the concept of being able to structure your finances so you EARN, SPEND, THEN PAY TAXES versus EARN, PAY TAXES, THEN SPEND you are well on your way to reducing your tax burden.  Right, wrong or indifferent, this is why many Fortune 500 companies pay ZERO federal tax.


Read Next: Steps to Legally Reduce Your Taxes

*Full disclosure I am NOT a CPA nor a certified financial advisor (or any other alphabet soup designation) and all of the information in this section is provided solely for educational purposes and does NOT constitute legal or tax advice. EVERYONE should consult their own financial advisors, CPAs and tax strategists to compile their own individualized plans.*

Connect

Sign up for the Nexus Newsletter and Blog! (we will not spam you nor sell your info)