Earnings Overview

If you earn $750K as a business owner, you can pay nearly double what an investor pays on the same number. This section explains why that happens, and the levers that can narrow the gap.

Key numbers

Why this matters

The U.S. tax code falls hardest on those who work for their income. A business owner earning $750,000 pays roughly $267,000 in federal income and payroll taxes, an effective rate of 35.5%. An investor earning the same $750,000 entirely from long-term capital gains pays about $136,000, or 18.2%. The business owner pays nearly twice what the investor pays on the same income. In fact, the investor could earn $1.3M before their tax bill matched.

I'm not here to tell you if this is good policy or not. But it's the reality you're planning around and it pays to understand it clearly.

The good news for self-employed business owners is that being self-employed comes with a wide range of strategies that can help you keep more earnings. This playbook covers a handful of strategies, all of which work by changing how you structure your business and cash flow rather than by putting money at risk. They require an understanding of your personal situation and a good CPA. If you take away one thing, I hope it's this: a lot of benefits come from having a good CPA or team in your corner as you navigate taxes.

Key tax rates

Income tax

Income tax applies to almost everything you earn. The federal rate runs up to 37% depending on how much you make, and each state adds their own on top. It hits wages, interest, rent, lottery winnings. The main things it doesn't touch are gifts, inheritances, and certain exempt income like municipal bonds.

Payroll tax

Payroll tax funds Social Security and Medicare. It's 15.3% of earnings, split between Social Security (12.4%, capped at $184,500) and Medicare (2.9%, uncapped, plus an extra 0.9% above $200k single or $250k married). If you're a W-2 employee, you split this with your employer. If you're self-employed, you pay the whole thing yourself.

Although these taxes are different, the strategies you use to reduce them should not be viewed independently. As you'll see, one change to your structure can shift how everything else works.