Two years after quitting my job: 2013 in review
nathanbarry.com
nathanbarry.com
It accounts for his wife and child, but does not take into account any personal deductions like mortgage interest, donations, or anything else. The state rate is approximately correct for Idaho where he lives though the state uses brackets below $10,000.
Just from the amount of deductible self-employment tax he's close to using itemized deductions, but would have to add more personal deductions to get to that point.
Business income: $256,725.00
Business expenses: $65,000.00
Self-employment tax amount: $19,233.48
Self-employment tax effective rate: 7.49%
Federal tax amount: $34,625.50
Federal tax effective rate: 13.49%
State tax amount: $12,463.45 (assuming flat rate of 7.4%)
Total tax amount: $66,321.43
Total tax effective rate: 28.38%
I do have a CPA who will do my actual taxes.
We are all quite healthy, so the plan is pretty cheap. Unfortunately it is going up to about $375/month with a slightly higher deductible starting next year.
With my previous job they paid for a plan that was about $700/month and had a $1,500/year deductible. Though that was more expensive since I was on a group plan (and I'm cheap to insure).
I've heard this as "It's not what you make, it's what you save" which puts the emphasis on building wealth.
But I have zero debt, no financial obligations, and $50k in the bank, so I'm doing fine. Just not what I would have expected after a year like 2013.
It's also a good idea to do the same thing for investment. Especially with the amount of taxes you're paying, being sure to take advantage of government tax-advantaged retirement plans is important. You make too much now to do a Roth IRA, but you can still do a traditional IRA. I'd recommend using Vanguard, investing in index funds, and again setting up automatic investments so that you don't have to think about it.
(This is the first time I've read your blog and I know nothing about you, so maybe I'm saying things you already know, but I thought it couldn't hurt to post anyway. As you mention, you're in great shape either way.)
Balance is important here as the IRS watches these situations closely, but any decent accountant should help someone down this path.
I had prepared an example that showed you could actually pay less in FICA, while still being reasonable in the eyes of the IRS. Maybe not ideal to post it here though.
Here in the UK, the self employed pay less (9% vs 12%) in the equivalent tax (called National Insurance here) than the employed, with the tradeoff being that they can't claim various state unemployment benefits (for obvious reasons).
But I am annoyed my insurance costs are going up by quite a bit, but in the grand scheme of things I still pay very little.
Everyone, effectively pays 15.3% of gross SS-covered wages up to $113,700 and 2.9% on income above that.
If you aren't self-employed, exactly (not "roughly") half of that (the so-called "employer's share") is not directly visible, while half of it is reflected in payroll deductions.
Also, 92.35% of that profit is taxable, and as dragon writer said you stop paying FICA at $113,700 and then you play only 2.9% for Medicare.
Here are examples of self-employment tax at different levels of income:
$100,000 - $14,129.55 in taxes, an effective rate of 14.13%
$200,000 - $19,455.10 in taxes, an effective rate of 9.73%
$300,000 - $22,133.25 in taxes, an effective rate of 7.38%Not quite. Some taxes are paid by the employer, and some taxes are withdrawn directly from your paycheck. When you are self-employed, you see exactly how Uncle Sam gets both sides of the action.
I'm not American, but every time I look at taxation levels, I come out with a number significantly smaller than that. I presume that America uses progressive taxation, so at what income level does personal income + payroll tax equate to 50% of gross?
In short, if anyone is paying that much in taxes they are very much doing it wrong... and I kind of doubt people are.
> Under the SE Tax Act, self-employed people are responsible for the entire percentage of 15.3% (= 12.4% [Soc. Sec.] + 2.9% [Medicare]); however, the 15.3% multiplier is applied to 92.35% of the business's net earnings from self-employment, rather than 100% of the gross earnings; the difference, 7.65%, is half of the 15.3%, and makes the calculation fair in comparison to that of regular (non-self-employed) employees.
The rest of your figures aren't really what I'd consider personal income taxation, although they're definitely interesting. Also interesting is that married people in the US of A experience a tax advantage when filing jointly - not so our tax code, it's very theoretically pure.
It's not quite that simple. Filing jointly confers a tax advantage when the couple makes relatively little, but becomes neutral as they earn more, and is actually a tax disadvantage when the couple makes a significant amount.
That could be the catchphrase for the entire US tax code. :D
> The rest of your figures aren't really what I'd consider personal income taxation, although they're definitely interesting
I'd say that sales tax is personal, but property tax maybe not, since that isn't directly related to income. However, it still means that for every dollar that someone pays you to do work, you only get to spend 58 cents.
Does US sales tax apply to purchases by a business?
No, they aren't. There are a handful of states where the top marginal rate (combining federal and state rates) is at or above 50%, but that's not the overall rate even for those top earners, and its certainly not the average overall rate in the country.
[1] Because of the real estate, many of these types of places are not really 'livable', and you see entry level jobs that offer salaries already at or neat the top tax brackets (despite the fact that these people have few/no assets or real 'net worth').
The claim was that personal income tax "in the US" was about 50%.
That's very different than saying the truth which is that "maximum marginal income (including payroll) tax rates in the highest-tax US states are around 50%".
> you see entry level jobs that offer salaries already at or neat the top tax brackets
The top US federal marginal rate starts at $400,001 for a single filer; $450,001 for married filing jointly/qualified widow(er), $225,001 for married filing separately, and $425,001 for head of household.
I've never seen anything fairly described as entry-level offering a salary at or near that, even in expensive places like SF.
eg, $90K in California? back of the envelope
28% $87,850 to $183,250 Federal Rate
15.30%* Social Security, self employed
8.8% State-Level taxes
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~ 52% Aggregate tax rate (excluding 9% sales tax average).
This is not an average rate, nor does it include the provision of the healthcare mandate. In any event, this is meant to be illustrative only, and the marginal and average dynamics play out differently at higher rates (for a variety of reasons, including tax-sheltering and regressive taxes on payroll and sale/consumption taxes).
[1]http://www.calcxml.com/calculators/federal-income-tax-calcul...
In your example of someone earning $90k in CA, the federal income tax rate of 28% only applies to the $2150 of income above the threshold of $87,850, the rest is taxed at lower rates according to the lower brackets. The same applies to state taxes, except the brackets are different.
The effective tax rate (e.g. the total amount of tax you pay / your total income) has a lot more meaning, and that one is a lot lower than 50%.
The original claim that started this thread, "Personal income taxes are about 50% in the US", is not true at all.
No, its a 52% combined marginal rate, not a 52% tax rate. And, since we're talking about taxes on income, "excluding 9% sales tax" is a red herring, because sales tax is not a tax on income. (And California's statewide sales tax is 7.5%, not 9%.)
> In any event, this is meant to be illustrative only
And what it fails to do is illustrate that the claim "Personal income taxes are about 50% in the US" is true. the fact that if you choose one of the states with the highest state taxes on personal income (including both income and payroll taxes), the top marginal tax rates on personal income just exceed 50% does not mean that personal income taxes in the US are about 50%. In fact, it demonstrates that personal income taxes in the US are generally substantially less than 50%.
Exactly. The. Point. Go read the my comment in context... Not only do I set out to illudtrate the marginal tax rate, I expressly not that it is not the average rate. There is a reason for that, which I mention earlier...too. Which I won't repeat myself to point out here.
Edit: I suppose it could be argued that money that goes to the military doesn't directly mean funding wars. We have bases all over the world after all.
http://gyrovague.com/2013/10/30/half-the-donut-why-an-entrep...
I have considered doing a v2 where the starting point would be "$100k sitting in a company account" and the goal would "as much cash as possible in my personal account", but I'm not sure this would be particularly useful or any more realistic. For example, in Singapore the optimal strategy would be to draw zero salary and take out everything as tax-free dividends, but most entrepreneurs can't afford to wait a year to get any money at all.
http://livingwage.mit.edu/places/0607567000 https://zenpayroll.com/blog/the-true-cost-to-hire-an-employe...
Singapore's a bit of an outlier - the government owns one of the busiest ports in the world, thus requires less income from tax compared to others.
If you compare the US to other Western democracies, how does it fare?
Finally (and currently the biggest part) I have a forum of 20 like-minded people all helping each other out each day. I'm pretty active as well. Just answering questions ranging from landing page feedback, pricing advice, to which audience you should choose.
Unfortunately, just about every forum that could be plugged into one of those "Membership site made easy" Wordpress plugins seemingly got lost in the 90s.
It's tough to do this stuff in a vacuum. I've got a hipchat room I hang out in regularly that has the same vibe, and there is value in hanging out with smart & motivated people working towards similar goals.
Great exercise though.
Which kind of soccer do you play? With 11,7 or 5 players?
On Chrome it worked, but didn't really give me visual indicator that it did - if I didn't have my phone nearby, I wouldn't have known that I got a confirmation email.
Not such a good first impression of software that's supposed to specialize in email conversion :(
While others are focusing on the $s, 2 non-cash things jumped out at me.
And then… taxes. Which are brutal. I suspect it's the administrative overhead, rather than the taxes themselves. This can take away a lot of energy and focus.
Now that he is getting a bit older (2 years old) it’s been harder to take long flights with him. Kids don't travel well when they're old enough to walk, and too young for iPads. this will get better in a year.