One of the sad realities to working for myself is that my goal income really isn’t my goal income.
For instance, say I’d like to be bringing in $30,000 a year (or a little over $2,000 a month) in order to feel comfortable in my normal spending habits. Assuming our debts continue on their current trend, by the time I’m ready to step out of the corporate rat race our debts should be very close to zero. Combined with my husband’s retirement income this sounds like a nice solid figure, after all I’m not looking to end up in a mansion, but it turns out to be significantly short of what I’d really need.
To start with we’ll assume that $30,000 is net profits and not gross — thus ignoring all the costs associated with running the business itself. (The overhead, the supplies, the incidentals that are going to add up to a bit more than 0% of my lofty $30k goal.) We’re also working with the idea that these are nice round numbers and there are no deductions or other finagling to bring things down from the ‘dream income.’
Enter the Government (dun, Dun, DUN!)
So the first bite out of my dream income is the Self-Employment Tax of 15.3%. This chunk is to make up for the taxes that my employer would normally pay for me. (Remind me to thank them for that at some point…)
$4,590.00 now belongs to Uncle Sam.
The second bite goes to the Federal Income Tax of [$1,670.00 + (15% of everything over 16,700)] (Married Filing Jointly as a Sole Proprietor). While half of the Self-Employment Tax can be used to bring down the Adjusted Gross Income, I’m not likely to escape this tax level : the income range for the 15% bracket is 16,700 to 67,900 based on the 2009 tax tables. Most likely this will go up and not down in the foreseeable future… so we’ll assume the full $30,000 is getting hit with the tax.
$1,670 + ((30,000 – 16,700) * 0.15)) = $3,665.00 is off the table and off funding my Senator’s retirement plan.
The third bite comes from the VA Individual Income Tax, which is $720 + (5.75% of everything over $17,000). This seems like a drop in the bucket compared to the first to, which is just darned depressing when you think about it.
$720 + ((30,000 – 17,000) * 0.0575) = $1,467.50 is winging away to help pay for pothole repair and the light rail to nowhere.
The Moral of this Story
Thus, working on very very rough numbers, my $30,000 is now $20,277.50… and it’s not quite as comfy a level as I’d like. In order to keep the ‘spending money’ at $30k, my lofty goal of $30,000 a year is really a lofty-er goal of $45,203.28.
Which means moving the numbers around in my spreadsheet, maybe cutting back a bit on the things I’m planing on spending the money on, maybe tossing some lower profitability ideas, or otherwise shifting my goals to accommodate the reality of Money I Make vs Money I Get to Keep.