Imagine two women, both earning $100,000 a year, yet one keeps significantly more of her income while the other watches a huge chunk disappear to taxes. What’s the difference? It’s not luck – it’s the fundamental structure of the U.S. tax system. Caitlin and I have seen this story unfold many times.
Meet our clients Emily, a hardworking W-2 employee, and Sarah, a savvy business and real estate owner. Their tax journeys couldn’t be more different. The flow chart below reveals why: As a W-2 employee, Emily pays taxes first and spends what’s left, while as a business owner, Sarah gets to deduct her expenses before Uncle Sam takes his cut.
Client 1: Emily the Employee
Emily works a typical 9-to-5 job, receiving her income as a W-2 employee. Every month, a portion of her paycheck is automatically withheld for taxes—federal, state, Social Security, and Medicare. After that, she has what’s left to cover her living expenses like rent, groceries, and other essentials.
Here’s how Emily’s situation breaks down:
Annual Income: $100,000
Taxes Withheld (Approx 25%): $25,000
Net Income After Taxes: $75,000
Emily pays for all her personal expenses—rent, food, car payments—after the taxes have already been taken out. She has no flexibility to reduce her tax bill because she can’t claim work-related expenses or investments in her career development. For Emily, taxes are fixed and come off the top, leaving her less room to save or invest for the future.
The result? Emily earns, then pays taxes, and finally, covers her living expenses. Her income feels stretched, and she has limited options to improve her situation through tax-saving strategies.
Client 2: Sarah the Business Owner
Now let’s meet Sarah, who owns a small business and investment real estate. She has the freedom to manage her income differently. Because Sarah runs her own business, she earns money, then deducts her business expenses, and only after that pays taxes on what’s left.
Here’s how Sarah’s numbers compare:
Annual Revenue: $100,000
Business Expenses (Travel, Office, etc.): $30,000
Taxable Income After Deductions (AGI): $70,000
Taxes Owed (22% Bracket): $15,400
Net Income After Taxes: $84,600
Because Sarah deducts her business expenses before paying taxes, she owes less overall. Not only does she reduce her taxable income to $70,000, but her lower AGI also puts her in a lower tax bracket, further lowering her tax bill.
Sarah has a significant advantage because she can deduct business expenses—like her home office, business-related travel, and professional development—before calculating her taxes. These deductions reduce her taxable income, so she pays taxes on $70,000, not the full $100,000. The result? Sarah gets to keep more of her income, and her tax bill is smaller compared to Emily’s, even though they both started with the same $100,000.
What Does This Mean for You?
The difference between these two clients is striking: Emily pays taxes first, leaving less money for her expenses, while Sarah deducts her expenses before paying taxes, which reduces both her taxable income and her tax rate. This is the power of smart tax strategy. By understanding the rules and taking advantage of tax deductions, Sarah keeps almost $10,000 more than Emily, even though they both earned $100,000.
Last year I paid $0 in Federal income taxes with an income over $400k using these strategies. If you're wondering how to maximize your tax savings, whether as an employee or business owner, Caitlin and I can help you explore strategies to reduce your tax burden and keep more of what you earn. It’s all about understanding the rules and playing smart.
Ready to see how we can customize a strategy for your own situation?? Click here to schedule a FREE Call with us to learn how we can help you set up a financial and tax plan that grows your wealth and keeps more money in your own pockets.
Currently working a W-2 job? Click here to download our Top 10 Tax Strategies for W2 Earners!
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