What's the best thing about being a business owner?
Oh, the list is endless! The freedom, the flexibility, the ability to control your own destiny, the opportunity to build something that compounds on itself year after year. (Yes, this email is putting aside all of the stress, frustration and downsides of being a business owner!)
Financially focused, though... business owners have a significant advantage over a W2 employee... the ability to put additional money into retirement accounts that count as a business expense, reducing your taxes. A business owner controls the ability for the company to make an employer contribution to the owner's retirement account.
This works best when the company:
- Has fewer employees
- Has significant net income (and the owner is in a high tax bracket).
Here are some strategies to discuss with your tax expert. (Don't have one? Ask us who we know!)
- A freelancer can contribute to a Solo 401k or SEP IRA. In the right situations, the employer contribution can be over $50k/year into these accounts - all of which would be tax deductible. That's in addition to your employee contribution ($19,000 in 2019).
- A high earner can set up a pension plan, which can put hundreds of thousands of dollars into an owner's retirement account (again, tax deductible as payroll expense to the business but doesn't get added to the owner's personal income).
- If you have kids, you can pay them through payroll (shifting dollars to a much lower tax bracket), then have them use these funds to save into accounts that can be used for college... even if your kids are toddler age! You need to follow some rules carefully to keep this legal and legit, but this can save you thousands of dollars in taxes.
In summary, for some business owners focused on wealth building, your first $50k - $300k+ earned can go entirely into your retirement accounts and generate NO taxable income. Get educated and take advantage of this opportunity so few people have.