Retirement options for freelancers [advice needed]

So, just to clarify—does the conversation regarding salaries start from that $80,000 figure? I suppose we’re talking about the full breakdown—Social Security, Medicare, federal income tax (which, as an employee, would be my portion of the invoice), and so on?

Basically, it all starts with those $33 and you end up paying taxes on whatever profit is left over at the end.

Is there actually a way to express—perhaps as a percentage—what portion of the initial gross amount might end up in my own pocket after everything has been legally paid out?

Basically, if we take x amount of total revenue, and y is what's left over for me personally, then y/x would be the ratio, right?
I suppose you could ask it that way, though I'm not entirely sure if that's the proper way to frame the question.

It is possible, but those are services you would end up paying an accountant a fortune for. Why should I bother getting tangled up in all that right now?😁

Mark Nguyen6 said:Is there actually a way to express—perhaps as a percentage—what portion of the initial gross amount might end up in my own pocket after everything has been legally paid out?

Basically, if we take x amount of total revenue, and y is what's left over for me personally, then y/x would be the ratio, right?
I suppose you could ask it that way, though I'm not entirely sure if that's the proper way to frame the question.

When you're running a business, you can't really look at it that simply. Expenses fluctuate constantly. Beyond that, money hits your pocket either through direct salary or profit distributions. You also "pocket" value indirectly—like buying a car under the company name and using it for your daily commute...

Just thinking out loud here.

So, if I'm following this correctly—and I might be misinterpreting things—the general consensus is that setting up an LLC (and essentially paying yourself a salary through it) would be the most cost-effective legal route available?

Also, just as a side note—how does dividend distribution actually work? I mean, what's the deal with the tax implications and all those extra fees involved in that process?

It’s not about how much you pay out in salary, it’s about what actually hits your pocket.

When you take a paycheck, you’re losing nearly 50% to payroll taxes and withholdings, whereas the corporate tax rate sits at 20%.

So, like most people do, I just set my base salary at the bare minimum and then, at the end of the year, I take my profit as a distribution taxed at that lower 20% rate.

It isn't always a flat 50% rate. The US tax system utilizes progressive brackets ranging from 15% up to 45%.

So, if we take the $41 revenue—minus 22% sales tax and then another 20%—we end up with $27
.
From that amount, I suppose I’d have to cover the minimum wage requirements along with payroll taxes (let's say that totals roughly $1.75) and then I'd be left with $25. Is that what I can actually pay myself as profit? Does that stay entirely mine? (By "entirely," I mean—just to be clear—that I wouldn't owe any further taxes or government levies on it?)

Gregory Williams7- My bad, I misspoke. What I meant was that nearly half of the gross salary disappears into taxes.

Mark Nguyen6- The math actually works out a bit better if you calculate it this way: you pay the salary first, then deal with the corporate income tax.

122,000 - sales tax (22,000) - salary (5,000) = 95,000 - corporate tax = $25333

And that’s what you’re left with, net.

Alright, so if I were to put it bluntly—using a shovel to move the dirt, so to speak—

$76,000 (profit paid out to myself) + $5,000 (salary also paid to myself) = $81,000 / $122,000 = roughly 2/3 of the total amount

Based on those numbers, the government takes about a third. Honestly, that doesn't look nearly as bad as I feared; I probably would have agreed to that anyway. I guess I had this vague, somewhat foggy idea that the tax hit might be closer to 50%. To be perfectly honest, I had no clue that profit could actually be distributed like this—especially not in such a "clean" manner. In my ignorance, I was under the impression that taking money out of a company like that was some kind of criminal offense (please, don't laugh at me)—and that the only legitimate way to get funds from a business was through a standard salary payment
.
Of course, once you factor in things like using the company to purchase business expenses... it looks even more favorable than before.
Well, I have to admit, looking at it this way, it sounds quite reasonable. I don't see any real need to go looking for complicated workarounds. Using a corporation seems like a natural and perfectly acceptable choice.

Many thanks to everyone for the advice.

Maybe just watch those calculation periods: you mentioned an annual gross income of about $50 which was the basis for that rough math using $41 yearly revenue, but when talking salary (usually) we mean monthly—so there's no way $1667 is actually an annual salary.
My math would look something like this (not an expert, just what I've picked up):
$122,000 minus 22% sales tax = $100,000 minus 12x minimum gross salary (maybe $3,000?) minus business expenses (phones, travel, per diems, car use, equipment depreciation, rent... let's say 12x$2,000) = $13333 (profit)
I guess you pay 20% on profit ($8,000), leaving you with $32,000, plus you pay 15% for healthcare on your salary and set aside 20% for Social Security. You'd probably walk away with about $2,100 net, and since the tax-free portion is $1,800 (if you don't have dependents), you'd pay 15% tax on the $300 difference. So, from $3,000, you're left with maybe $2,050, or roughly $24,500 for the year. That means you've got $24,500 in salary and $32,000 in post-tax profit, totaling $56,500 out of the $122,000 total collected 😢. Man, I really hope I'm wrong, so please correct me if I am... I guess it only gets better if you can bump up business expenses, like buying stuff through the company that you'd normally pay for out of pocket (like a new truck or something?)

Yes, I actually just stepped in to say that—it looks like there was a bit of a slip in the math there. I’m actually out driving right now and it just occurred to me—we should be looking at 12 monthly paychecks a year, not just one, obviously.

You're absolutely right.

Furthermore, those payments made to her didn't just "vanish" into thin air. 😁They must be factored into the total amount she withdrew from the company.

It feels like watching one of those "Aha!" moments on the news. 😉

Gregory Williams7 said:Furthermore, those payments made to her didn't just "vanish" into thin air. 😁They must be factored into the total amount she withdrew from the company.

It feels like watching one of those "Aha!" moments on the news. 😉

Could you perhaps elaborate on that?

So, let's look at this logically. If you were to pay yourself, say, $1667 over a twelve-month period as a salary through your corporation. That implies you've allocated roughly $100–$200 toward Social Security and another $50 toward Medicare, plus perhaps $1,000 for standard deductions or federal taxes. However, if you take $2,500 out of that initial $5,000 and pay it directly to yourself as personal income, you have full access to those funds via 😁
.
Consequently, that entire amount totals $2,500 multiplied by 12, which equals $10000. This sum is deposited into your account throughout the year alongside the figures we calculated previously.

Therefore, when calculating the annual cost of running a small business, you shouldn't focus on $1667 (or whatever the total includes with various benefits). Instead, you should only count what is actually surrendered to the IRS. Everything else stays in your pocket rather than going to the government.

When you launch a business, you face two distinct categories of expenses: general operating costs and your own salary as an employee.

The nuance lies in the fact that since you serve as both the owner and the sole staff member, your salary isn't a true external expense. Is it really money leaving the business? Not quite. You are simply transferring funds from the company account into your own pocket.

But isn't that precisely what he was getting at?

George Phillips said:Maybe just watch those calculation periods: you mentioned an annual gross income of about $50 which was the basis for that rough math using $41 yearly revenue, but when talking salary (usually) we mean monthly—so there's no way $1667 is actually an annual salary.
My math would look something like this (not an expert, just what I've picked up):
$122,000 minus 22% sales tax = $100,000 minus 12x minimum gross salary (maybe $3,000?) minus business expenses (phones, travel, per diems, car use, equipment depreciation, rent... let's say 12x$2,000) = $13333 (profit)
I guess you pay 20% on profit ($8,000), leaving you with $32,000, plus you pay 15% for healthcare on your salary and set aside 20% for Social Security. You'd probably walk away with about $2,100 net, and since the tax-free portion is $1,800 (if you don't have dependents), you'd pay 15% tax on the $300 difference. So, from $3,000, you're left with maybe $2,050, or roughly $24,500 for the year. That means you've got $24,500 in salary and $32,000 in post-tax profit, totaling $56,500 out of the $122,000 total collected 😢. Man, I really hope I'm wrong, so please correct me if I am... I guess it only gets better if you can bump up business expenses, like buying stuff through the company that you'd normally pay for out of pocket (like a new truck or something?)

Or maybe I just misunderstood the math here?

I am unsure. I seem to have lost my way. He likely stated it was correct, did he not?