I’ve been thinking about starting my own business and am wondering, how much will I need to bring in to equal what I’m currently making as an employee?
Ask the Mompreneur:
This is a great question, but a complicated one with many variables. At a high level, you’ll need the following information to come up with a good approximation:
- Your current take home pay. This is your salary less all federal, state, local, and payroll taxes.
- Your estimated business expenses. According to the IRS, legitimate business expenses are those considered “both ordinary and necessary,” and can cover expenditures such as website design and contract labor. You’ll want to make sure to stay within the bounds of the law, but it is also common for small business owners to start claiming a portion of expenses such as their broadband internet and car payment. Your expenses will increase the amount you need to earn, but will also directly decrease your tax liability as a business owner.
Example
Let’s say you currently make $100K in salary. After 22% federal, 7% state, and 7.65% employee payroll taxes, you take home $63,350. Let’s say you will shift $15,000 of your expenditures to the business (a combination of auto, cell phone, business meals and entertaining, and trips). Now your new personal income target that you need to “equal” is $48,350.
Then you start your own company and earn $117K in revenue. From that you deduct the above mentioned expenditures plus an additional $15,000 in marketing, supplies, and contract labor expenses, leaving you with $87K to pay taxes on. At the same federal and state rates and a higher 15.3% self-employed payroll tax rate, you’ll take home $48,459, or basically the same as your current take home pay as an employee.
So in this scenario, you need to bring in approximately 17% more in business revenue than you currently earn as salary to come out even.
Final thoughts
As you can see, there are many factors to consider and every situation is unique. This example doesn’t take into account the cost of benefits or current payroll tax reductions for 2011 only.
Tax laws are constantly changing and vary by state and city. There are also a myriad of business entities that you can choose to form, from sole proprietorships to LLCs to S corporations, all of which have their own rules, liabilities, and advantages. So make sure to work with a good accountant as you decide how you want to move forward.
Thanks to the Charlotte CPA firm of Larry A. Clark for reviewing this information for accuracy.
To get your business featured in this column, please email your entrepreneurship, parenting, or work life balance questions to Charlotte executive coach Dr. Jennie Wong at Jennie.Wong@LimelightExecutiveCoaching.com.
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