How to Build Wealth Twice as Fast as an Entrepreneur
• Nathan Garcia, founder of the Pocket Plan, explains how entrepreneurs can reduce their tax burden and increase their net worth by structuring their compensation differently.
• Earned income, the type of income most entrepreneurs pay themselves, is subject to high marginal income taxes at the federal and state levels, as well as payroll, self-employment, and unemployment taxes.
• Entrepreneurs paying themselves earned income end up paying 61% of their income in taxes, resulting in working for themselves only from mid-July onwards.
• To start working for themselves earlier in the year, entrepreneurs can follow the example of Fortune 500 CEOs by paying themselves unearned income or capital gains.
Strategies for reducing income taxes for professionals
• Income acquired through sources other than work, such as interest or dividends, can be taxed at a lower rate, resulting in reduced taxes.
• Unearned income taxes can range from 0% to 20% depending on the individual’s marginal income tax bracket.
• Many executives opt for a lower salary and higher stock options to structure their compensation package and reduce taxes.
• Examples of successful entrepreneurs implementing this strategy include Warren Buffett, who pays himself a salary of $100,000, and Amazon CEO, Andy Jassy, who receives a $175,000 salary but has a $212 million compensation package.
• Other executives, such as Kathy Warden of Northrop Grumman and James Umpleby of Caterpillar, also have significantly lower salaries compared to their overall compensation.
Compensation Packages and Tax Strategies for Entrepreneurs
• The overall compensation package of Kathy Warden consists of more than just her salary, with stock options making up a major portion.
• Stock options are taxed at the unearned income rate, which can be as low as zero percent or as high as twenty percent, compared to the higher rates of earned income.
• By paying a lower tax rate, entrepreneurs can retain more money and increase their wealth faster.
• Entrepreneurs have flexibility in structuring their compensation to include stock options and reduce taxable income.
• Using stock options reduces payroll taxes and allows for a rate dependent on earned income.
• The drawback of using stock options is the inability to contribute to an IRA.
• For further information or questions, contact Nathan Garcia to schedule a 15-minute call.
