When you receive a raise, it’s natural to expect a significant boost in your take-home pay. However, the reality is that the more money you make, the more the IRS will take, leaving you with less than anticipated. This is due to the progressive nature of the U.S. tax system, where higher earnings push you into higher tax brackets.
Imagine you receive a $50,000 raise. You might think your boss will divide this amount by 12 and add it to your monthly paychecks. Unfortunately, it’s not that straightforward. As your income increases, so does your tax liability. The IRS will take a significant portion of your raise because you’ve moved into a higher tax bracket. This means your net increase in take-home pay will be less than the gross amount of the raise.
One way to mitigate the impact of higher taxes is by forming a Limited Liability Company (LLC). Here’s a step-by-step guide to help you navigate this process:
1. Create an LLC: This legal structure can offer tax advantages and protect your personal assets.
2. Obtain an EIN: An Employer Identification Number (EIN) is necessary for tax purposes and to open a business bank account.
3. Open a Business Bank Account: Have your employer pay your salary into this account. This separates your personal and business finances, making it easier to manage expenses and deductions.
You can deduct various business-related expenses as an LLC, reducing your taxable income. Here are some standard deductions:
- Transportation Costs: Gas and maintenance for your vehicle when used for work.
- Work Attire: Clothes, underwear, and shoes specifically purchased for work.
- Meals and Entertainment: Meals are served during your shifts, and drinks are served when meeting coworkers for business purposes.
Categorizing these expenses as business deductions will lower your taxable income and, consequently, your tax bill. Forming an LLC and strategically managing your expenses enable you maximize your take-home pay and minimize the amount the IRS takes. Always consult with a businesscoach or a tax professional to ensure you’re compliant with all regulations and making the most of available deductions.
Bobb Rousseau, PhD
Business Coach
1-800-484-5731