Is it better to keep on working for someone else for a regular paycheck or start your own business and earn your own paycheck?
It wasn’t always this way. Once upon a time most of us were slaves to persons of privilege called masters, who in turn were owned by a ruling class of people. Slaves did the master’s bidding under threat of bodily harm or banishment, both of which often resulted in death. Some masters took minimal care of their slaves by feeding, clothing, and housing them, but for the most part slaves were worked until they ceased to be of value to their masters and were then disposed of.
It wasn’t long, however, before the slave-master realized that rewards for good work caused the slaves to do better work. Rewards included better food, cover from the weather and trinkets. Slaves were quick to discover that other slaves would trade amongst themselves for these rewards.
Giving slaves too much in the way of payment meant it was conceivable they could accumulate enough to break out of the system. To guard against this, the concept of requiring slaves to pay a tribute to the owner arose. For this tribute the owner would offer lifetime protection to the slave.
Slaves were still able to break away and set up shops and establishments of their own, and although these renegades competed with the slave masters, they provided so many of the goods and services slave masters valued, and provided them at such a low cost, the renegades were not only allowed to remain in business, they were encouraged.
Today we call these people small business persons or entrepreneurs.
And today a two-part system of exacting tributes continues to exist, one of which favors and encourages entrepreneurs. These are the W-2 and the "1099" (sometimes called "Schedule C") systems.
If you are a wage earner under W-2 you receive a paycheck with many of the "tributes" already deducted, and you can spend the remainder on food, shelter, clothing, transportation, education and other desirable things. No, you don’t earn $60,000 a year as you thought; you earn $30,000. Half your earnings are taken by various levels of government: federal, state, county, city and others.
If you operate under 1099, however, you receive the $60,000 up front, and you get to deduct the cost of sheltering your business, the cost of employees and other expenses before you pay taxes on the remainder. It is possible to arrange your business affairs so that you live well and only have to pay taxes on what is left after expenses. Sometimes this can result in $0 taxes!
Of course, you will have to hire accountants to get to that point, but even this cost can be subtracted in advance, further reducing your tax bite.
Now, which is better? Pay taxes of $30,000 on the front end of $60,000 in earnings, or paying little or no tax on the same earnings and still have all the perks of ownership?
This, of course, is a highly abbreviated view of why going into business for yourself can be one of the most rewarding things you can do with your life. But it gives you a starting point for thinking about the subject.
Paul Tulenko writes a newspaper column called "Small Business" for the Scripps Howard News Service. This article appeared in The Trentonian on September 21, 2002.