Make more, pay less

June 15, 2011

Look closely - especially if you're at work - and you can actually see her soul leaving her body.

Dissatisfied in your job? Here’s the time-tested solution: tough it out, be thankful you have one, and come in next weekend just to emphasize the latter point.

Or you can tell The Man which orifice he can shove his company picnic and break-room coffee into, and go out on your own. Incorporate.

There are several volumes’ worth of reasons to do this. We can’t go into all of them now, but one of the best-kept secrets of incorporating is the regressive Social Security tax.

You might not be familiar with the concept of a regressive tax, but it’s easy to grasp. There are 3 species of tax:

-A proportional tax is one levied at a fixed rate. Sales tax, for instance. If your jurisdiction charges 7% sales tax, then any item subject to the tax costs 7% more than the list price whether the item goes for $1 or $100,000.

-A progressive tax means the higher the base amount, the higher the rate. Income tax in the United States (and most everywhere else, as far as we know) is an example.

That leaves the rarest bird in the aviary, regressive taxes.

You mean there are taxes where the greater the amount subject to the tax, the less you pay? That’s absurd. And illegal, right?

It’s cute that you think that. Not only do regressive taxes exist, they’re authorized by the same federal government that you entrust to have your best interests at heart. To fund the 2 biggest and least tenable programs in its tentacles – Social Security and Medicare.

Out of all the confusing, capricious, seemingly arbitrary taxes we pay, Social Security and Medicare taxes might be the most senseless.

The federal tax collectors (sorry, we don’t know most of their names, but Doug Shulman is the Internal Revenue Commissioner) take about 15.3% of your salary in the form of Social Security and Medicare “contributions”. Collectively, these are dubbed FICA – after the Federal Insurance Contributions Act. Remember, Social Security was invented because federal officials of a bygone generation decided that Americans were too stupid to save for retirement. Therefore it would take a benevolent government populated by financial geniuses to make those critical investment decisions for our grandparents, our parents, you, me, and our descendants. Medicare is essentially the same thing, but earmarked for a different purpose.

If you never look at anything but the net pay amount on your paychecks, take some time to read the other numbers. Just once. That 15.3% breaks down like this:

-6.2% employee’s Social Security taxes
-1.45% employee’s Medicare taxes
-6.2% employer’s Social Security taxes
-1.45% employer’s Medicare taxes.

Hopefully this is obvious, but you’re wrong if you think your employer pays its share of these taxes as a necessary cost of keeping so wonderful a worker as you on the payroll. She doesn’t pay these taxes, she merely collects them. You pay them. Your employer factors these taxes into your salary when she hires you. If your employer wasn’t required to pour 7.65% of your income into the subterranean trench that is the federal government, she wouldn’t. Instead, she’d much rather attract you and other employees with wage levels that are 7.65% higher than what you think you’re currently making.

How is this regressive? Sounds proportional to me.

The Social Security portion of your FICA taxes is capped once your annual income exceeds $106,800. You pay the 2.9% in Medicare taxes no matter how much you make, but the Social Security portion can’t go above $13,243.20. (Half of that levied directly on you, the other half levied on you via your employer.)

So the higher your salary – past $106,800, anyway – the smaller the proportion of it you pay in Social Security taxes. On the one hand, this gives you incentive to work hard and earn money. On the other, it’s the kind of inequality that French revolutionaries chopped off people’s heads for.

If you’re an independent businessperson, and you structure as an S corporation or a limited liability company, you can run around the system instead of through it. Incorporate, and you can pay out part of your company’s profits to yourself as salary while paying out the remainder as dividends. The former is subject to FICA, the latter isn’t.

What’s the downside?

You’d be surrendering the “certainty” of a regular, constant paycheck. As if there exists an employer who could guarantee such a thing in perpetuity anyway.

Still, it sounds promising. So why doesn’t everyone do this?

The usual reasons: fear of the unknown, lack of faith in themselves, etc. The same negative thinking that’s been holding most human ingenuity back since we figured out fire and the wheel.

Note: Some people blather that sales taxes aren’t proportional because the less you earn, the higher a ratio of your income you pay in sales taxes.
First off, sales taxes aren’t levied on income, they’re levied on sales. See “income tax”, above. Second, there’s no way around this. Unless you think state legislatures and municipal governments should mandate that merchants ask people how much money they make before determining how much tax to collect.

**This article is featured in the Carnival of Wealth #43**

Filed Under: Entrepreneurship, Finance, Healthy Living, Personal Finance Tagged With: , , , , ,

In college? Switch majors. TODAY.

May 23, 2011

 

Did she major in a) philosophy, b) drama, or c) applied mathematics?

Problem: a college’s engineering students have futuristic ideas, but no clue how to monetize them. That same college’s business students have grand capitalistic designs, but nothing to market.

You can probably figure out the solution.

We’ve said repeatedly at Control Your Cash that formal higher “education” isn’t an absolute good. And we’ll continue to put the word “education” in quotes if people are going to classify Montclair State’s “How to Watch Television” as no less worthwhile than MIT’s Atomistic Modeling and Simulation of Materials and Structures. (No dismissive quotes required for that course description.)

State legislators and impressionable parents throughout the country transfer far too much taxpayer money into the pockets of directionless adolescents looking for a place to drink, protest and sleep late while deferring productivity. The tangibly beneficial college and university courses continue to get outnumbered by dross like everything listed here.

And then there’s the Cambridge of the Mojave, the University of Nevada-Las Vegas.
Indulge us with some time for a little local content.

To most people who think about this kind of thing, UNLV is a punchline – a basketball factory, a commuter school for unambitious commuters, the kind of institution that’s emblematic of the same faux learning that we’ve spent the last few paragraphs deriding and whose only redeeming feature is its world-renowned hotel management school.

Not quite. UNLV is also home to a groundbreaking program that should revolutionize post-secondary education: a partnership between the two most crucial schools at the college, engineering and business. (UNLV doesn’t teach medicine.)

(Note: Control Your Cash co-founder Betty is also a co-founder of UNLV’s Center for Entrepreneurship, known colloquially as the “E-Center”. Betty attended Northern Arizona University for one semester, realized her fortune lay elsewhere, and sought and achieved it. With no student loans to worry about paying off. Years later, she realized that the common financial sense she implemented in her own life barely existed in academia. But rather than dismiss the typical university education as largely pointless, she committed resources to finding a way to make it meaningful.)

The UNLV engineering/business partnership began as the fusion of two separate but easily unifiable ideas. Since 2000, the curriculum requires senior engineering students to form small teams and enter a design competition. Simply put, the teams have to invent something practical. And their brainchildren have been not just feasible, but inspiring: a cane that uses sonar (for blind people), motorcycle headlights that see around corners, etc.

A few hundred yards away, business students were doing something similar: creating plans and projections for potential businesses. The last couple of years your humble bloggers have had the pleasure of serving as judges for the business students’ contest, and we’ve seen some impressive proposals. They include the group that was going to import and distribute a revolutionary weatherproofing compound from South Korea, and the “micro-farmer” team who wanted to grow vegetables on abandoned urban lots. Some of the other ideas were less marketable than they were creative, still others were quite the opposite. But the very act of conceiving and developing these ideas did and will do far more good for the world than the nearby English class looking for meaning in the short stories of Jack Kerouac.

The trouble was that none of the engineering projects ever got off the ground. (Figuratively speaking, particularly in the case of the dolly that lifts 300-pound payloads 3 feet in the air.) Meanwhile the business projects, while some of them had potential, weren’t exactly recalibrating the boundaries of human endeavor.

So the deans of the departments got together and meted out a little interdiscipline. For full credit, the engineering students had to partner with the business students (and vice versa) to develop a viable plan. For the engineers, it meant developing an appreciation for normally mundane tasks like securing warehouses, filing paperwork, and learning how to market. For the aspiring MBAs, it meant gathering the requisite technical knowledge about how moneymaking gadgets make money. (Dr. Andrew Hardin, director of the Center for Entrepreneurship, got the inspiration for this from a similar program at Washington State University.)

You need both the yin and the yang. This is just one of countless examples, but there’s a $500 Universal Corporation all-in-one remote control at Control Your Cash headquarters that contains 43 buttons and 6 screens, most of which never get used. The device is supposed to control the TV, the DVD player, the satellite radio, the AM/FM, the CD players, the iPod and probably one or two other things. Three years in we still haven’t mastered this leviathan of overengineering, because we can’t be bothered to spend the necessary couple of days decoding its indecipherable user’s manual. Seriously, we don’t need 80 equalization pre-settings (“Classical”, “Bass Reducer”, “Sports”) for the tuner. We’re not Jimmy Iovine.

A competent business management team would have simplified the remote while maintaining its primary selling feature – the ability to control every electronic component in the house. The team would have hired an erudite technical writer to translate the instructions into something a layperson will want to comprehend, and packaged the remote as something more necessity than luxury. We can only wonder what engineering breakthroughs never make it to market, for lack of marketing.

When teachers’ unions in your state complain that you need to fork over more tax money for education, ask them if and how they’re prepping kids for crucial programs like UNLV’s engineering/business partnership. And making a legitimate difference in the world, not a theoretical one.

TONIGHT, the winners of the 2011 competition do a dress rehearsal for the forthcoming tri-state competition. If you’re in the neighborhood, swing by and see how the future doesn’t merely appear.

**This article is featured in the Totally Money Carnival #21-Memorial Day Edition**

**This popular post is also featured in The Carnival of Wealth #42**

Filed Under: Education, Entrepreneurship, Making Smart Choices, Net Worth, Personal Finance Tagged With: , , , , , , ,

Quit your job. Just do it already

March 18, 2011

Welcome back to Recycle Friday. This week’s post originally appeared on Planting Dollars last year. Aside from changing a couple of dates, it can run perfectly intact. And it’s even timelier now than it was then. If you happened to read it last year, and are still working as someone else’s employee, we hope it’s everything you hoped it could be. You’re also one year closer to death.

The guy on the left used to have dreams. And look like the guy on the right.

The career track as you know it is not a permanent condition of human life. It’s barely three generations old.

Civilization has been around for maybe 8 millennia. And for 7.9 of those, “career track” meant working on the family farm and eventually inheriting it. That’s if you were lucky and male. If you were female, it involved a lot of spreading your legs and hoping you survived at least enough childbirths to keep the lineage from going extinct.

In the late 19th century, technological advancement reached the point where agriculture exploded – the single biggest economic shift ever. It became so easy to grow more food than you and your family could possibly eat, that it freed up almost all would-be farmers to find new lines of work and create industries out of nothing. Even unglamorous jobs like carpenter and mason became feasible as careers: before then, it was the rare person who had the time or the economic impetus to build a house without living in it himself. Division of labor meant specialization, which resulted in people spending their lives building furniture or writing newspaper columns instead of just squeezing that activity in between the milking and the threshing. Attorneys, bankers and human resources directors were rare throughout most of human history. It’s only in modern times that these gigs have become something that a kid can aspire to. (Not that anyone “aspires” to run an HR department, but you get the concept.)

In the last couple of generations, the career track has been honed to a series of rote steps: do as many extracurricular activities as possible in high school. Get into as prestigious a college as your pedigree and necessarily thin CV will permit. Borrow to pay your tuition. Earn a degree. Go to your college’s job fair and find an employer whose vacation schedule and sexual harassment policy you can live with. Once you get hired, ensure that the times during which you choose to apply yourself coincide with the times your boss is watching. Come early, stay late, play company softball, show up on the occasional Saturday.

If that’s what you want out of life, fine. But understand that that strategy is neither permanent nor logical.

Look at the list of the richest people in the world. Notice anything about them, from Gates to Buffett to Carlos Slim Helu? None of them were salaried employees, at least not past adolescence. Sure, many of them inherited their money and a few might have acquired their fortunes somewhere south of ethically, but that’s not the point. With a handful of exceptions, you can’t achieve the peace and freedom that’s your birthright as a member of Homo sapiens just by filling out your time sheets correctly and handing them in by 5 p.m. Friday. Make partner at your law firm, and you’re committing to a life of greater responsibility at every rung – with more pressure, more gray hairs, and a greater likelihood of commencing that coke habit that all the cool attorneys have. (By the way, the next attorney or middle manager we meet who truly loves his job and its accouterments will be the first.)

This is not a recommendation to spend your life riding the rails and eating hobo stew. It’s a recommendation to start a business. The economic climate is ripe for entrepreneurship, which is ultimately the only thing that keeps progress progressing.

Huh? What are you talking about? The economy sucks on wheels.

Exactly. The dim affluence you could have enjoyed by staying in your loathsome job circa 2005 no longer exists. With every 8th American officially unemployed, you have to work harder just to tread water and keep your position. More misery, same result, only this time the result is more tenuous.

When you’re your own boss, this becomes a non-issue. All of a sudden, being productive and moving assets from lower-valued to higher-valued uses becomes more important than striking the right balance between not laughing at your boss’ jokes and laughing too hard.

Regardless of the nation’s regulatory climate, the cost of entry to entrepreneurship in 2011 is less than it’s ever been. Starting a software development company or a pool-cleaning business costs nothing more than an initial outlay of a few hundred bucks, if that. We talk about a rate of return for everything from bond funds to new industrial processes, but the rate of return on a sufficiently motivated human dwarfs anything you’ll find during even the most effervescent of stock-market bubbles.

There are tangible reasons for doing this, too. Arrange your business as an LLC or S corporation, and you’ll enjoy tax advantages that salaried and waged employees never experience. You can earmark much of what you buy and use in your daily life for exemptions and even credits. How this can be construed as worse than just having the same FICA deductions confiscated from your semimonthly paychecks is beyond us. Want to learn more? Modesty prevents me from telling you where you can, but someone wrote a useful book on the topic.

**This article is featured in the Totally Money Blog Carnival #12**

Filed Under: Entrepreneurship, Healthy Living, Making Smart Choices Tagged With: , ,
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