[DRU]

To follow up on that KS trick for those that might be able to benefit from it...or if you're just interested.

When you have a job, you have all "earned income" which is what shows up on your W2 that you get, and the tax person simply plugs that into the tax return. If all you have is W2 information, maybe some kids and a house, then you might as well just do your own taxes in TurboTax or whatever. There's nothing any tax pro will be able to do any differently.

If you have a business, though, a whole new world opens up. When you first start, you could go with nothing more than a "Sole Proprietorship". This basically means you're running things in your own name and isn't generally recommended because you'd be liable for any weird/crazy thing this world could spit at you.

So that's why you go ahead and add the LLC tag to the business, and it still runs as "sole proprietor LLC". This separates you and your personal belongings from the business...the LLC. Everything still falls to your own personal tax return, and you file a Schedule C along with your 1040 at tax time. This is where you add all the deductions I've been talking about.

Now, at this stage you actually pay MORE taxes in one area...self employment taxes. This consists of the FICA stuff that you see getting taken out of your paycheck when you work a job. As an employee, your employer pays half of that tax for you. You pay 7.5% (which is what you see come off your check), and the employer pays the other 7.5% for the total of 15%. As a self employed person you will be paying the entire 15%. This part does suck, but the deductions and the savings will be much better, so it's not that big of a deal until you start making good money with the business.

Once you are making good money with the business, now you can turn it into an LLC Sub-Chapter S (S Corp). This is still an LLC, but it's taxed as an S Corp. This is a beautiful thing.

As an S Corp, you can pay yourself a salary through an actual payroll system. The salary that you pay yourself has to be a "reasonable salary" and there are lots of debates about how to come up with that number. I basically just think of it like, if I were to hire somebody for what I do, how much would I pay them? You may have a job, though, where you don't have to work a lot of hours, so your salary could actually be quite a bit lower if that was the case. That's unique to each individual and needs to be worked out accordingly.

Anyway, the salary you pay yourself gets the normal FICA (social security, medicare) and income taxes taken out just like a paycheck does. The additional amount you pay yourself from the business above and beyond that, though, does not have to pay FICA. So now you're saving 15% of whatever that amount is. You still pay income tax on that amount, but just not the FICA. So that can be huge savings.

For example, say your business generates $120k net, after expenses and being cautiously aggressive with your deductions. If you just pay yourself that $120k you would have to pay 15% of that entire amount in FICA taxes. So instead, say you pay yourself a salary of $60k/year, and the other $60k you pay yourself as a shareholder dividend. This would be a W2/K1 split, because you would show salary income (W2) of $60k and shareholder dividends (K1) as separate income.

The $60k that you get on the K1 does not get any FICA tax hit. 60000 * .15 = 9000. That's $9,000 you'd be putting back into your pocket in that example, just by doing the S Corp W2/K1 split. Again, in most cases you still pay the income tax on this portion...just not the FICA.

Now, the KS thing is even better! If your business is in KS, you don't even have to pay income tax on that K1 portion!! If you live in MO then MO ends up taking it from you, so it doesn't help you then. But if you live in KS and you have KS S Corp, and you're paying yourself a "reasonable salary"...anything above and beyond that salary would be completely tax free.

So then if you get to the point where you do hire somebody to take your position, and you pay them that salary instead, now your only income is K1 income, and you don't pay any taxes at all. Boom!

Now you can take all of these tax savings, get out of debt, and start buying assets. Build or buy other businesses, rental properties, etc. The more assets you buy the more tax breaks and more savings you get.

Meanwhile, all the people working hard in a job, getting promoted to get more money...just get more taken right off the top. If you have nothing but a W2 then you're getting screwed, quite frankly.

It's why the rich keep getting richer and the poor and middle class can't get ahead. If you're an employee they're taking almost 50% of your money when it's all said and done before you get to spend any of it. It's no wonder you don't have anything left over to save and invest. You don't have to be rich to think like this and handle your finances, though. It can be done at any level, and at any level it will help you get ahead.

Turn yourself into a business...no matter what it is...and you open yourself up to a world of savings that can truly change your financial situation.

If you're buying boats and sports cars and motorcycles (ie. liabilities) like the guy mentioned previously, then you're doing it wrong. Buy assets, and the positive cashflow from the assets will buy all the toys you want later.