Mark Zuckerberg famously pays himself a $1 salary
And Jeff Bezos’ salary from Amazon has been $81,840 since 1998.
We all know they both actually *make* more than this from their respective businesses so why would they choose to pay themselves so little on paper?
Answer: They understand how taxes work.
And they know that compensation is not about your salary- it’s about the value of what you take home in total. And the goal is to maximize that value regardless of what’s on their paystubs.
We all intellectually understand this.
If you’re not a business owner and you’re looking for a job, you understand that your pay is about more than just your base salary. Your bonus, health insurance, 401k match, and other employee benefits offered by your potential employer all add up to contribute to your total take home.
Your total compensation matters.
As an entrepreneur this is also true. And as an entrepreneur if you understand how to use tax planning to your advantage in your business, you can take home more money from your business on the exact same revenue
This is something I love to teach because it can have such a huge impact.
BUT, you don't need to be an entrepreneur to be on the same footing as Bezos and Zuck.
In fact, even if you’re an entrepreneur who takes advantage of the opportunity you have to optimize your business salary, draws, and expenses to maximize your take home pay from your business- you'll still pay more lifetime taxes than you otherwise could by taking things a step further.
The income that comes from your business is all earned income, and earned income runs through the federal income tax brackets and is taxed at a much higher rate than investment income.
Jeff Bezos and Mark Zuckerberg are able to keep their tax bills low by taking low salaries and owners draws from their businesses because they have built up assets that generate investment income to cover their lifestyles.
Whether you’re an employee or an entrepreneur, you can do the same thing, but it takes planning.
First, you need to understand the difference between earned income and investment income.
What qualifies as earned income and how is it taxed?
Well, earned income is:
Owners Draws from a business
Rental income from real estate
401k, 403(b), TSP, and Traditional Withdrawals
On earned income, we pay Federal income taxes based on a marginal tax system.
That means everyone who is married and takes the standard deduction in 2023 pays no tax on their first $27,700 of earned income. Yes, even Bezos and Zuck.
And 10% tax on their next $22,000. And 12% on their next $67,450, and 22% on their next 101,300, and so on. The federal tax brackets go up to 37% right now, and if you live in a state with a state tax, you’ll pay that on your earned income too.
But there are other types of income.
Investment income from stocks, bonds, and mutual funds held for more than 1 year are taxed at long term capital gains.
Depending on your taxable income bracket in the year you realize those gains, this might be 0%, 15% or 20%.
If you have money in Roth IRA, Roth 401(k), or Roth 403(b), that money is completely out of the federal income tax and capital gains systems and all gains on those dollars are tax free in retirement.
So, no matter what your situation, if you can use some of the earned income you are earning, and invest it into accounts that are NOT subject to federal income taxes, you can effectively pay very little taxes in the future when it’s time to spend that money WITHOUT having to live a small lifestyle.
Think about this:
Society likes to lament about how little rich people pay in taxes, but the reality is that that’s not fully true. There are lots of rich people who pay A LOT of money in taxes. You probably know some of them. You might be one of them.
Rich people (i.e people with high salaries, owners draws, and/or rental income) can only pay low taxes if they have lots of losses on prior or current investments related to that income OR if they are using that income to build wealth outside of the federal tax system to later supplement or replace that earned income with tax preferred money.
Of course, some of these people come from generational wealth and have trust funds that pay investment income so they don’t really have to build it themselves, but I believe that’s the exception, not the rule.
The point is, you don’t need to own Facebook or Amazon to pay less money in taxes and keep more of the money you’re working so hard to earn and put to work for you. You don’t even have to own a business. But you do have to know it’s possible, and then be intentional about building tax diversified wealth. The payoff is huge.
And if you need help, you know where to find me. Just hit reply- I always respond.