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I subscribe to Nathan's emails (some of the only emails I read regularly, they're that good and useful btw)and was really happy to read he had such a successful

I subscribe to Nathan's emails (some of the only emails I read regularly, they're that good and useful btw)and was really happy to read he had such a successful year. But I was also saddened to see that he admitted to not having as much money in his bank accounts as he had hoped or planned. He mentions that taxes were huge, but being employed rather than self-employed myself, is he paying that much more in taxes than he would be if was just a salaried employee at a regular company?

nugget 13y ago
He admits to lifestyle creep as his income increased. It's not what you make, it's what you spend. That's the best personal finance advice I ever received, but very unintuitive for most people unfortunately.
- nathanbarry 13y ago
  Yep, it's pretty much just spending more on lifestyle. I grew up relatively poor (for my area) so I always thought I'd live on just a little bit of money, even if I had far more. That didn't really happen like I thought. 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.
  - nbouscal 13y ago
    One of the best ways to prevent your spending from getting away from you is to set up automatic saving. Most banks and credit unions will let you set up automatic monthly transactions to put some amount into a savings account without you having to think about it. Once it's set up, the "out of sight out of mind" principle kicks in for your benefit. 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.)
- aaronblohowiak 13y ago
  > It's not what you make, it's what you spend. I've heard this as "It's not what you make, it's what you save" which puts the emphasis on building wealth.
- deleted 13y ago
  [deleted]
skittles 13y ago
The self employed pay 15.3% of gross income to FICA and Medicare taxes. This amount cannot be avoided (no tax breaks). Employees pay roughly half this percentage. It's also very easy for the newly self employed to see the money rolling in and spend it. One has to be disciplined enough to set aside enough for taxes in a separate account.
- stirno 13y ago
  This isn't necessarily true. Its fairly common to have an S-Corp (or LLC filing as S-Corp) dodge a significant chunk of the self-employment tax by paying a lower salary and then shareholder distributions for the rest. Balance is important here as the IRS watches these situations closely, but any decent accountant should help someone down this path.
  - skittles 13y ago
    After looking into this, it looks like the IRS will ding you if you pay yourself less than what it would take to hire someone to do the same job.
    - stirno 13y ago
      The IRS will, effectively, value your job in the event of an audit and determine whether you paid yourself reasonably compared to your market for your skills, experience, etc. 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.
      - a8da6b0c91d 13y ago
        How do those CEOs with $1 salaries get the all clear? Their compensation is all capital gains, yeah?
        Romoku 13y ago
        Long term capital gains is less than the alternative minimum tax. Executive compensation probably consists of a mixture between stock options and company paid expenses (airfare, company car, vacations, travel, nice office equipment, etc).
dkokelley 13y ago
> "...is he paying that much more in taxes than he would be if was just a salaried employee at a regular company?" 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.
- wmeredith 13y ago
  Yeah, this was quite the shocker for me once I started making serious side money. Personal income taxes are about 50% in the US. (Which, by the way, would be totally fine with me if it funded infrastructure and social safety nets. Unfortunately, the vast majority of that goes to wars against nebulous foes, i.e. drugs, terrorism, etc...)
  - EdwardDiego 13y ago
    > Personal income taxes are about 50% in the US. 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?
    - stirno 13y ago
      You'd need to combine a very very high income level (well above $450k/yr with lots of money getting taxed in the highest federal nominal bracket), live in a state with high income tax and have a bad accountant. In short, if anyone is paying that much in taxes they are very much doing it wrong... and I kind of doubt people are.
    - derekp7 13y ago
      According to the 1040 tax tables, 100,000 gets taxed at 21,454, so that is 21.4%. Add on 15% FICA (if self employed), 5% state tax, and you are up to 41.4%. Now if you own a house that the county assessor says is worth $200K, you are talking about 8K a year in property tax (this will vary by area, but is true for where I'm at in the midwest). That leaves $55,546 out of the 100,000 to spend. Ok, now try to spend it -- you will pay 8% in sales taxes, for another $4443.68. So all you have left is a shade over 51k, out of that initial 100K that you earned. So not quite 50% taxation, but close enough (actually, some sales taxes are higher, such as gasoline, etc).
jpatokal 13y ago
Tax-wise, the US is among the worst places to be self-employed. Per this little calculation of mine, an IT entrepreneur earning $100k would keep >99% in Singapore, but <57% in SF. (Massive caveats apply and are enumerated in detail in the article.) http://gyrovague.com/2013/10/30/half-the-donut-why-an-entrepreneur-earning-100k-gets-to-keep-over-99k-in-singapore-but-under-57k-in-san-francisco/ http://gyrovague.com/2013/10/30/half-the-donut-why-an-entrep...
- gamblor956 13y ago
  I was going to rebut the linked article, but it has so many basic factual errors that it's easier to say that the article is completely useless. Suffice to say, when you cherry pick the financial considerations included in your "model", it's easy to reach whatever conclusion you want.
  - jpatokal 13y ago
    As the author of said article, I'd be keen to hear about these "factual errors". Yes, the calculation makes a lot of assumptions, many of them generous, but these are clearly laid out upfront. And while I agree that you would probably not want to use the exact model laid out ($2k salary plus company profit as dividends) in each country covered, you've got to establish some sort of baseline to be able to sensibly compare them! 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.
    - gamblor956 13y ago
      For starters, at least half of your US tax rates are either wrong or wrongly applied. Beyond that, you'd have to pay me to spend the time to detail all of the inaccuracies. My hourly rate starts at $300.

nugget 13y ago

He admits to lifestyle creep as his income increased. It's not what you make, it's what you spend. That's the best personal finance advice I ever received, but very unintuitive for most people unfortunately.

nathanbarry 13y ago
Yep, it's pretty much just spending more on lifestyle. I grew up relatively poor (for my area) so I always thought I'd live on just a little bit of money, even if I had far more. That didn't really happen like I thought. 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.
- nbouscal 13y ago
  One of the best ways to prevent your spending from getting away from you is to set up automatic saving. Most banks and credit unions will let you set up automatic monthly transactions to put some amount into a savings account without you having to think about it. Once it's set up, the "out of sight out of mind" principle kicks in for your benefit. 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.)
aaronblohowiak 13y ago
> It's not what you make, it's what you spend. I've heard this as "It's not what you make, it's what you save" which puts the emphasis on building wealth.
deleted 13y ago
[deleted]

skittles 13y ago

The self employed pay 15.3% of gross income to FICA and Medicare taxes. This amount cannot be avoided (no tax breaks). Employees pay roughly half this percentage. It's also very easy for the newly self employed to see the money rolling in and spend it. One has to be disciplined enough to set aside enough for taxes in a separate account.

stirno 13y ago
This isn't necessarily true. Its fairly common to have an S-Corp (or LLC filing as S-Corp) dodge a significant chunk of the self-employment tax by paying a lower salary and then shareholder distributions for the rest. Balance is important here as the IRS watches these situations closely, but any decent accountant should help someone down this path.
- skittles 13y ago
  After looking into this, it looks like the IRS will ding you if you pay yourself less than what it would take to hire someone to do the same job.
  - stirno 13y ago
    The IRS will, effectively, value your job in the event of an audit and determine whether you paid yourself reasonably compared to your market for your skills, experience, etc. 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.
    - a8da6b0c91d 13y ago
      How do those CEOs with $1 salaries get the all clear? Their compensation is all capital gains, yeah?
      - Romoku 13y ago
        Long term capital gains is less than the alternative minimum tax. Executive compensation probably consists of a mixture between stock options and company paid expenses (airfare, company car, vacations, travel, nice office equipment, etc).

dkokelley 13y ago

> "...is he paying that much more in taxes than he would be if was just a salaried employee at a regular company?" 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.

wmeredith 13y ago
Yeah, this was quite the shocker for me once I started making serious side money. Personal income taxes are about 50% in the US. (Which, by the way, would be totally fine with me if it funded infrastructure and social safety nets. Unfortunately, the vast majority of that goes to wars against nebulous foes, i.e. drugs, terrorism, etc...)
- EdwardDiego 13y ago
  > Personal income taxes are about 50% in the US. 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?
  - stirno 13y ago
    You'd need to combine a very very high income level (well above $450k/yr with lots of money getting taxed in the highest federal nominal bracket), live in a state with high income tax and have a bad accountant. In short, if anyone is paying that much in taxes they are very much doing it wrong... and I kind of doubt people are.
  - derekp7 13y ago
    According to the 1040 tax tables, 100,000 gets taxed at 21,454, so that is 21.4%. Add on 15% FICA (if self employed), 5% state tax, and you are up to 41.4%. Now if you own a house that the county assessor says is worth $200K, you are talking about 8K a year in property tax (this will vary by area, but is true for where I'm at in the midwest). That leaves $55,546 out of the 100,000 to spend. Ok, now try to spend it -- you will pay 8% in sales taxes, for another $4443.68. So all you have left is a shade over 51k, out of that initial 100K that you earned. So not quite 50% taxation, but close enough (actually, some sales taxes are higher, such as gasoline, etc).

jpatokal 13y ago

Tax-wise, the US is among the worst places to be self-employed. Per this little calculation of mine, an IT entrepreneur earning $100k would keep >99% in Singapore, but <57% in SF. (Massive caveats apply and are enumerated in detail in the article.) http://gyrovague.com/2013/10/30/half-the-donut-why-an-entrepreneur-earning-100k-gets-to-keep-over-99k-in-singapore-but-under-57k-in-san-francisco/ http://gyrovague.com/2013/10/30/half-the-donut-why-an-entrep...

gamblor956 13y ago
I was going to rebut the linked article, but it has so many basic factual errors that it's easier to say that the article is completely useless. Suffice to say, when you cherry pick the financial considerations included in your "model", it's easy to reach whatever conclusion you want.
- jpatokal 13y ago
  As the author of said article, I'd be keen to hear about these "factual errors". Yes, the calculation makes a lot of assumptions, many of them generous, but these are clearly laid out upfront. And while I agree that you would probably not want to use the exact model laid out ($2k salary plus company profit as dividends) in each country covered, you've got to establish some sort of baseline to be able to sensibly compare them! 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.
  - gamblor956 13y ago
    For starters, at least half of your US tax rates are either wrong or wrongly applied. Beyond that, you'd have to pay me to spend the time to detail all of the inaccuracies. My hourly rate starts at $300.