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: , ,

Why the Self-Employed Are STILL Smarter Than You

January 7, 2011
Self-employed, Self-determination, Incorporate, Save Taxes, Make Money

Self-employed, kind of. Also he blinked when we asked permission to use the photo

This is an updated version of a post that ran on LenPenzo.com 11 months ago. We’re thinking of doing something similar every Friday, the argument being that a) of our 3 weekly posts, you probably pay the least attention to the Friday one and b) everyone else recycles content once in a while, so why not us? As it stands you’re still getting over 2000 words of freshness weekly. More importantly, we actually edit our stuff. Those 2000+ words are polished to a keen sheen before you get to read them. Otherwise, we’d be like that one chick who cranks out 20 blog posts a week and opens them with insight like “Thanksgiving is a great time to reconnect with family.”

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Who pays a greater share of his income in taxes – Warren Buffett, or his driver? (Actually, Buffett’s so eccentric he probably drives himself. In a 1970 LTD with 8 million miles on it.) Still, posing the question implies its answer. Details below.

Politicians may tout the virtues of our “progressive” tax system, but it doesn’t really favor the poor over the rich.

Nor does it favor the rich over the poor, not when 40% of federal tax receipts come from 1% of the population. Fairly or otherwise, the tax system favors the diligent over the unprepared. (As most things in life, so maybe the system is fair.) Specifically, the system favors independent businesspeople over salaried workers.

This topic requires a book-length explanation (such as the groundbreaking and heretical Control Your Cash), but to summarize, starting your own business lets you enjoy tax advantages wage slaves only dream of. Take two people in the same field, making like incomes, living in the same city (which means their costs of living should be similar), only one owns his own business and the other works for someone else. It’s eminently possible that the latter person’s tax bill is 9 times the former’s.

Declare your independence today, if your career lets you make a horizontal shift to entrepreneurship. If you’re an anesthesiologist, you can’t rent out an office and put up a sign that reads “Mepivacaine Administered Here—Happy Hour 4–7.”  But if you’re an accountant, real estate agent, home inspector, software engineer, attorney* or in any kind of creative profession, you can take advantage of complex tax laws.

This isn’t the kind of entrepreneurship that requires you to open a physical storefront and spend years building a customer base. These are changes you can make now that will immediately impact your bottom line.

I tried to go as long as I could without using the first-person pronoun, but my story illustrates the point. 5 years ago I was working for a decently-sized advertising agency as a senior copywriter, making somewhat more than the nation’s per capita income. One day I ran the numbers and realized I could make more money going out on my own.

I collected most of my new clients, other ad agencies, via word-of-mouth. But most importantly, I took on the very agency I’d left as a client. And charged them about 30% more than they paid me as an employee. There are two components to that: 1) they were underpaying me to begin with, but had to cough up once I exercised my leverage and threatened to walk and B) the daily rate they paid me after the switch was just for the services I rendered – nothing else. It included no employee benefits, no capital expenditures for a workstation, no space reserved for me at the office Christmas party (thank God), no food/clothing/transportation allowance, no 6.2% Federal Insurance Contributions Act tax, no unemployment insurance premium. The responsibility for all that now fell on me.

Which is wonderful. It meant that instead of my former employer enjoying all the possible tax deductions from my labor, I got to take advantage of them. My taxes got a little more complicated – I now had to keep more detailed records, and file quarterly instead of annually – but the benefits grossly outweighed the costs.

It’s easy to get started, but also easy to make mistakes. You don’t want to be a single proprietor. You want to found an S Corporation, a legal entity that protects you from creditors who are forbidden from coming after certain classifications of income. An S Corporation lets you separate your money between salary and capital gains, the latter of which is taxed at a lower rate.

Find a company that specializes in entity formation. It’ll cost maybe $400-500 for them to register you with the relevant state’s Secretary of State office. You don’t have to register in your home state, either. If you live in California or New York, you don’t want to—those states’ laws don’t protect you enough from creditors. Register in Delaware or Nevada or, failing that, your home state.

Once you incorporate it starts forcing you to think like a businessman. Your income will now be tabulated on IRS 1099 forms, rather than those infamous W-2s. As a practical matter, once you incorporate you’ll pay (correction: your company will pay) you a salary. What’s a reasonable amount to cover your annual living expenses— maybe $24,000? Then that’s what Employee #1, you, will receive and pay taxes on. After deductions, your effective tax rate on the salary will be close to 0.

But what about the rest of your company’s income? Legally speaking, the rest of the revenue your S Corporation takes in is not salary, but shareholder dividends. Which are taxed at a lower rate than salaries are. And you can now deduct all sorts of business expenses before calculating the net shareholder dividends you’ll pay taxes on. Go to IRS.gov and check out Form 2106. Your employer fills one of these out every time you go on a business trip, or eat a meal on company time, or buy anything related to your job. Your employer, not you, then enjoys the tax deduction.

(As for Warren Buffett’s driver, he probably makes around $80,000 a year, which would put him in the 25% bracket. Almost all of Warren Buffett’s income is in capital gains, and the highest long-term capital gains rate in the U.S. is 5 percentage points lower than the assistant’s marginal tax rate.)

*Leeches, all of you. Thanks for making the tax code so damn complicated in the first place. If not you, then your ilk.

**This post was featured in Tax Carnival #79: Filing season begins**

Filed Under: Capitalism, Economics, Education, Entrepreneurship, Finance, Net Worth Tagged With: , , ,

Forced Savings = Voluntary Servitude

July 4, 2010

Refund anticipation loan, IRS, Tax return, tax refund, tax refund loan, refund loan

Can we finally shoot some sodium pentothal into the idea that tax refunds are a good thing?

Refunds for taxes work on the same principle as refunds for anything else: you paid too much, and the payor returns the difference to you. Except you rarely require a refund in your everyday, non-taxpaying life, because private businesses are smart enough to know what to charge you and what to give you in return.

Imagine if a vendor – say, your home insurer – asked you to pay your annual bill in estimated installments throughout the year, and promised to pay you any overage at the end of the year. In other words, they’d like you to deposit some money with them, and withdraw it at 0% interest later. No homeowner in her right mind would consent to this, and no insurance company that wanted to stay in business would offer such an absurd payment plan.

Why people act any differently with their federal and state governments is a mystery. Especially when the government a) lets you defer payment, and b) might not refund your taxes on timee.

Oh, you didn’t hear? Our federal government is insolvent, as are most state governments. Like Rhode Island’s, whose Division of Taxation managers have now decided to refund taxpayers whenever.

The people who run the state’s Division of Taxation* have already postponed tax refunds a couple of times. The helpful answer for angry taxpayers is to “be patient.” Try telling that to your creditors. It’s a lot more difficult if you’re not representing a state agency.

State employees are keeping Rhode Island taxpayers (and Hawai’i taxpayers, and Georgia taxpayers etc.) waiting unduly long. But the taxpayers themselves share some of the blame, like a homeowner who leaves his door unlocked or a raped woman who wore a push-up bra**.

You don’t have to be in the position of waiting for some government tax clerk to mail you a check, not when it’s perfectly legal for you to make him wait for your check. We’ve said it before, and we repeat it in the book (available now on Amazon – for your bookshelf or your Kindle.) Get the minimum taken out of your biweekly paychecks, invest what you would otherwise have had withheld, and cut the government(s) a check on April 15. (Oh, you live in a state with an income tax? Sorry, couldn’t hear you over the guffawing of the Floridians, Montanans, Alaskans, Nevadans, Washingtonians, Wyomingites, South Dakotans, New Hampshirites and Tennesseans in the audience.) You can do this. You should do this. You’re insane if you don’t.

Why do lawmakers even allow this? Because they know that most taxpayers are terrified – of repercussions, and of themselves. Those pusillanimous taxpayers grossly outnumber the others, so much so that it’s not worth changing the rules to inconvenience those in the latter category. If you’re in the former category, letting the government enjoy your money interest-free all year, you can’t get in any trouble when the deadline to pay your taxes arrives. Government tax managers know this, and thus allow you to pay “tardily” (i.e., by the deadline.) Exploiting that – taking advantage of laws that everyone knows about but hardly anyone capitalizes on – is a crucial component of Controlling Your Cash. The government might be legally authorized to kill you***, unlike private businesses, but don’t forget to take advantage of the Law of Large Numbers. There are 300 million of us. The IRS and state tax agencies, as burgeoning as they are, can’t demand early payment from every one of us. They can only withhold your money if you give it to them first.

Understand, no one’s encouraging you to avoid paying your taxes. But take advantage of the legal ways to postpone the damage as long as possible. You have to cut the government a check anyway. There’s no discount for doing it early. In fact, we’ve shown that you can be punished for doing it early. So why wouldn’t you wait until the last possible second to pay?

*It’s an important distinction: institutions don’t levy taxes, send soldiers to war, nor deny benefits. People do. Just like governments don’t allocate money, so much as government agents confiscate money from taxpayers and then spend it in a place of the agents’ choosing. If this sounds like a rant from a Bircher, it isn’t: my membership expired years ago. But it is an undeniable fact, and it personalizes what people too often think of as happening only in the abstract. The next time you hear “state x has a budget shortfall”, understand that a budget deficit is not some irresistible force of nature. What this really means is “the people who make economic decisions for the state chose to spend more of the taxpayers’ money than they could afford.”

**Relax, skirts. I’m kidding.

***America’s finest satirist, P.J. O’Rourke, points out that if you don’t pay your taxes, you get fined. If you don’t pay the fine, you go to jail. If you try to escape from jail, you get shot.

Filed Under: Taxes Tagged With: , , , , ,
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