The tax code incentivizes businesses, plain and simple. If you’re a business owner, you will always pay less taxes than being an employee of a business making the same money. There are several reasons for this but ultimately it boils down to one thing, economy.
The government can tax business owners more, but that just means they’ll have less funds to work with. Less funds means less spending power, less capability to grow, and less opportunities to hire staff. This doesn’t suit the government because the private sector is a HUGE employer. Most people don’t have government jobs or work corporate, they work for private businesses in their communities. It is in the government’s better interest to help small businesses so they can continue to employ the locals and keep the cash flowing.
So what’s the main difference between income earned by an Entrepreneur and income earned by an employee? It’s how the money is taxed. Employees are taxed on their entire salary
while business owners or self employed individuals are taxed on the NET profits.
For example, if a single person earned $100K on W2, they’ll pay 24% tax on their income which comes out to $24K.
If you are self employed and earned the same amount, you will first deduct all of your work related expenses like car, cell phone, etc. Let’s say you deducted $40K of expenses leaving you with a $60K net profit, your tax rate now becomes 22% and you’ll pay $13,200. That’s a savings of $10,800!
If you are currently an employee but have a passion for a side hobby. You’re encouraged to consider turning it into a business. You never know where that will lead.