Do you think successful business people like Bill Gates and Steve Jobs became successful by spending 50% of their time working for someone else? The answer is NO! In this article, I will answer how people get rich and how you can too! Lets first differentiate between 2 types of income: Employment and Business income.
Employment income is probably what you most of you are familiar with. If you work for someone else, (store associate at Lululemon, Nurse at a Hospital, etc) then you are making employment income.
As I mentioned in my previous article “Who do you ACTUALLY work for?” in some situations you can be working for 12 months, where 6 months of your pay goes directly into taxes.
As a quick recap, the amount of tax that you owe is calculated by your annual salary * the applicable tax bracket. If your annual salary is $50,000 your tax bracket is 30%. This means you owe the government $15,000 of taxes, leaving you with only $35,000. There are very few ways to avoid this situation so basically the fate of your employment income is DOOMED. To make it worse you still need to pay for groceries, rent, and etc to stay alive.
Business income works a bit differently. Corporations such as Loblaws, Lululemon, and Toyota, and even small start-ups all generate business income.
There are 2 major benefits of business income:
1. Deductible Expenses from Taxable Income:
With business income, you can deduct a variety of expenses which reduces the amount of income the government is allowed to tax. Some examples of the expenses are meal & entertainment, costs to operate an online store, rent of office space, and a lot more!
Let’s say you start a corporation in Ontario selling T-Shirts and the business makes $50,000 of annual operating profit. If this were employment income you would be taxed on the full $50,000, but business income allows you to deduct a variety of expenses. Let’s say all the eligible expenses equal to $26,000. This means you get taxed only on $24,000 (50,000-26,000).
2. Lower Tax Rate
To make things even better, the business income tax rate for private Canadian corporations are approximately 10% (on the first $500,000 of profit)! So in the end, your business only pays tax of $5,000 (50,000 * 10%).
Business income allows you to pay for all your expenses FIRST and then you get taxed at a lower rate.
While with employment income you get taxed FIRST at a higher rate, and then you still have to pay for all your other expenses.
And this is why a lot of rich people have a lot of money! Rich people figured out a way to avoid having 50% of their hard earned money go straight into taxes by creating corporations to shelter their money. Meanwhile, most people who are employed have to continue paying the 30%-50% of their salary every year! Is this fair? Probably not, but these are the rules that we live in so it’s up to you whether you want to win or lose the game.
After reading this article, would you ever want to start your own business? Let me know in the comments section!