I have a confession. Taxes are not my favorite subject. The tax code is a complex labyrinth of opinions and verbiage which would take a lifetime of research to try and clarify. Unfortunately, in working with over 200 practice owners I can say that a vast majority of your financial complaints are due to some problem involving taxes. Look, I totally understand, you don’t like paying taxes. You don’t like payroll taxes, income taxes, state taxes, or capital gains tax. You don’t like franchise taxes, gross receipts taxes, property taxes, excise taxes, sales taxes, medicare taxes, social security taxes or any of the other 150 ways taxes are levied against you. It’s unfair, immoral, economically unsound, and a source of serious financial suppression for many people.
So I get it. Taxes suck. However for the majority of practice owners, taxes are NOT the problem. In fact, they are not even close to your problem. Lack of INCOME is the problem. Too much debt load is the problem. In the Econologics system, we measure your taxes through a metric called the effective tax rate. It is the total amount of income, state, social security, and medicare tax you pay compared to the amount of personal income you make.
For example, if you make $150,000 a year in salary and profit distribution, and all that tax combined is $30,000, then your effective tax rate would be 20% (30,000 / 150,000). That leaves you $120,000 left over to live your lifestyle. Most practice owners with a $1,000,000 gross income practice fall into this range of having an effective tax rate of around 15-25%. Let’s do a comparison. If you are making $275,000 of income then your effective tax rate is likely to be 30-35%. So let’s do the math: $275,000 X 35% = $96,250. That leaves almost $178,750 left over. I think most of you would agree that having $178,750 left over is better than $120,000.
Part of my job as an Econologics Advisor is to give you a much bigger tax problem. The manner in which I recommend you drive up your income is to set up an automatic and systematic payment to yourselves every week from the business to your as owner’s compensation. Why? Because that means you are making MORE INCOME. Will it drive up your effective tax rate? Heck yes! Do I care? Heck no! I would MUCH rather ensure you have a tax problem then an INCOME problem. And I am totally OK with you paying 30 cents in tax on every dollar you keep than paying $0 taxes on a dollar you never received in the first place.
Many of you pay your accountants an enormous amount of money. Too many of your accountants are only doing tax preparation with you as opposed to tax planning. Let’s give them something to do. Give them the problem that you are making so much money that they need to dust off their accounting books and get to work finding out ways to help you reduce your taxes. As a matter of fact, we have a whole arsenal of advanced tools which can help identify areas where you may be able to reduce your tax load. These include Section 79, 412(i) plans and Captive Insurance Companies. You need to be making in excess of 500k of personal income to make these work, but they are fabulous tools.
So forget the tax man and ignore all the negative and undue attention put on paying taxes. Make so much income that your accountant is pulling out his hair and is screaming from the top of his lungs “STOP MAKING SO MUCH MONEY!” And for Pete’s sake, stop letting the tax-tail wag the dog.