“One of the only ways to get out of a tight box is to invent your way out.” 

— Jeff Bezos, CEO of Amazon

This concept is one of the cornerstones of what I am calling the Money Outlaw lifestyle. Starting a business and becoming a self-employed entrepreneur is one of the best decisions I believe anyone can ever make. It is not without its challenges and it certainly isn’t a “get rich quick” way to wealth, but it is incredibly rewarding.

Apparently, I am not alone in my thinking. One of the most profound books I ever read was called The Millionaire Next Door. The companion book was called The Millionaire Mind. One of the key points in both books is that a disproportionate amount of self-made millionaires were self-employed.

As an entrepreneur you have incredible freedom over your income, freedom, time, taxes paid, type of work you do, who you work with, and several other elements I will discuss further. I also believe you have much more security in self-employment than in any type of wage-earning job. In the Millionaire Mind book, the author says most self-employed millionaires consider it too risky to not be self-employed.

As a 9-5 wage-earning employee, you have several constraints put on you. It may not feel like you have those constraints depending on the job and employer you have, but they are there even if you don’t realize it.

So let’s compare the differences in these two approaches to life…

Value of Your Contribution vs. Wage Earned

Wage Earner

Unless you are commission sales your income level is outside your control. You can be sure that whatever you are paid is less than your contribution to the business. How do I know this? Because businesses must make profits to survive. Profits happen because expenses are kept lower than revenue. Expenses include your wages. For a business to be profitable it must meet this very simple formula so based on simple math I can conclude you are NOT being paid equal to your contribution to the business.

The first argument someone will present is high-wage earners like doctors, lawyers, senior executives, etc. Yes, it is true if you happen to be in one of these professions you may have a very large income. This income may be larger than you could earn on your own due to economies of scale of a large business. However, you can be sure no matter how high that income is you are still paid less than the contribution you make. If you are happy with your income and job and don’t mind this being the case then self-employment may not be for you.

If you happen to earn a high income just remember income is not necessarily indicative of wealth. There are many other variables that go into being happy and self-fulfilled in your career and I would argue income isn’t the most important.

Entrepreneurship

As a self-employed freelancer, you decide your income level. If you want a higher income you need to secure more and higher paying customers. It is up to you to determine the source of your income. I personally subscribe to the multiple streams of income business model where my income is derived from a variety of sources that don’t always involve me trading my hours for dollars.

As a self-employed entrepreneur, I have that control. I decide how much I will bill for the work I perform. Yes, I do have some constraints such as prevailing market rates for the work I perform, but I am certain I earn as much as I am worth because I control it. I have a lot of control over not only how much I earn, but how I earn it and to me that brings a quality of life I have not found anywhere else.

Those of you that still think the level of income is at the top of the heap aren’t thinking creatively enough. In addition, there is a big difference between income and wealth.

Earnings Rate

I think is important to point out that I am not necessarily discussing the actual amount of income you are paid vs. the control you have over it. I know that there are many people that work for large companies in senior positions who earn far more than some entrepreneurs. I am not arguing that concept. I will point out that there are small business owners who are some of the wealthiest people in the country and are multi-millionaires that have an income and net worth far higher than most senior executives at large companies. There are also entrepreneurs that have built amazing companies that went public and put them in the top wealthiest people on earth categories such as Steve Jobs, Mark Zuckerberg, and Bill Gates.

Conversely, there are many small business owners and freelancers making considerably less than those same people and will never make the same level of income. However, it is important to note that the exact rate of income earned is only one measure and I would argue not even the best measure. Further, I will argue that many small business owners make more self-employed than they would do a similar job for an employer and that is the key point. You have a fantastic set of tools and strategies as an entrepreneur to move money and assets around in very tax-efficient ways that will allow a smaller income to increase your wealth in ways a W2 earning employee never can.

If you choose this path, you will discover there is a lot of value in the concept of how you earn it. I recently met an entrepreneur that ran a small business. He also had other passive business and investment activities that covered most of his living expenses and contributed to his wealth. He told me at the end of most years he earned $60,000 in earned income but contributed $57,000 (the max) to his 401(k). This strategy allowed him to take his “active” income (higher-taxed income) and move almost all of it into a tax-advantaged situation (his 401k). In case I lost you with this example so far you need what the IRS calls active income to contribute to retirement plans. You can’t contribute passive income to them. Instead of living off this income, he used other passive income to live off, which came with its own tax advantages. What he did was 100% legal and he filed and paid all the taxes he owed. How he did this is a pretty advanced topic I will cover in a future article, but suffice it to say these kinds of things are possible when you are a creative entrepreneur.

Freedom of Time & Work Performed

Wage Earner

As a wage earner you are often required to be at your place of employment a set number of hours each day and must report at a fixed time and not leave before a certain time. In addition, you don’t typically have a lot of control over who you work for, with, or on. Your boss often determines these things and that applies even if you don’t like or respect them. Your colleagues are who they are, and you have little control over them as well.

When I worked for employers early in my career I can speak from first hand experience that I worked for supervisors that were miserable people and made approximately 1/3 of my life very crappy and I could argue even more, because I would stew after work about things that happened at work. I have also had colleagues I worked with whom I did not like or respect, but I had to work with them just the same. In addition, for some it gets even worse. Not only do you have to work with these people at work, but in our connected society you may have them emailing, texting, or calling outside of work hours. Finally, let’s not forget the company outings that often happen after work or on weekends where you are expected to attend with people you don’t like or respect while pretending that you do.

The projects you work on are often assigned to you and you have very little freedom in the types of work you perform. Again, as stated above this can vary depending on the type of work you do and the employer you work for.

The work you perform could be a soul killing experience. In companies it is not uncommon to work at wasted activities and to have to perform work over again or do meaningless activities that you have zero control over. Further, you may be assigned projects or clients that are miserable to work with.

Early in my career I was hired as a project manager for a digital marketing agency. I was assigned a client that was caustic in nature. They insisted on holding weekly conference calls to air their grievances. Unfortunately, the people they really wanted to blame were not in the room. I was. I dutifully sat for at least an hour with the account executive and was berated for everything they perceived we were or were not doing. I was not given the choice to work with these clients I was assigned to them. My only out was quitting and finding another job.

You may be in an ideal situation where all these elements are great for you personally. Many don’t share your situation. For most people at least one of these variables, perhaps, all of them, are less than ideal.

Entrepreneurship

Owning your own business means you have far greater control over your time. You decide what time to report to work and how long to work. You decide the structure of your work/life balance. Of course, some critic will argue that if you don’t work enough you won’t make any money and will be broke. True, I didn’t say you didn’t have to work or work hard. I said you have control over when and how that work is performed. Instead of being told when to report and leave and how much vacation you take and when, you control these.

In addition, many people that hold traditional jobs don’t realize the sheer amount of time that is wasted on meetings, writing memos and emails, conversing with colleagues, and dealing with red tape of any business. All these items contribute a considerable amount of time you must spend at work dealing with them. In your own business you have much more control over these items.

I have discovered over the years that I can get more completed in 4 hours than many other people working for employers get completed in 8-9 hours. I still deal with meetings and I still converse with colleagues, but I do it in a different way and have more control over the time invested and when that time is used.

Being self-employed I have a lot more control over the types of projects I work on and who I work for. If someone calls me with a project that doesn’t sound interesting, I simply refer them to someone else. If I have a client that is difficult to work with, I fire them, and pick up a new one I like better and enjoy working with. If I have a contractor, I work with that I don’t get along with I replace them.

I believe people that are self-employed have a much higher sense of accomplishment for the work they perform, how it is completed, and for whom it is done. If you find yourself in a project with one or more of these variables less than ideal it is within your power to control it that doesn’t entail you shutting the business down and starting a new one. With a job leaving and finding new employment may be your only option.

Income & Resource Control

Wage Earner

As a W2 wage earning employee your earnings come through a simple mechanism of a paycheck. You have very little control outside of maybe deferring some of that income into a 401(k) plan, which you didn’t set up and don’t control or possibly some basic benefit plans like a flex spending account. Outside of these minor diversions your income comes in the form of W2 income. That means you get almost no tax deductions for your wages except ones like the standard deduction, mortgage interest, etc. that every American gets. You will find W2 income earners pay the brunt of taxes in this country because they have no escape hatches.

Investments for your future earning potential such as additional skills or education are paid for with after tax dollars. You don’t get business expense deductions, except in extremely rare and limited circumstances. For example, a teacher may be able to deduct money they spend for educational supplies that isn’t reimbursed. However with rare exceptions your income is fully taxed. In fact, those taxes are taken out of your check before you even get it. The government keeps the money all year without paying a dime in interest and then gives you a “refund” of your own money back at the end of the year. People are happy and spend the money and go on vacation or buy something and think this was some kind of favor the IRS did for them.

Entrepreneurship

The self-employed enjoy a completely different experience. You can control so many other variables that will never be enjoyed by W2 wage employees. For starters you can control the way your income is paid to you. While it is outside of this discussion there are a myriad of ways with corporate structures and payment systems to pay yourself in ways that legally allow you to pay rock bottom tax rates while maximizing your earnings. Notice, I said legally. For example, paying yourself a wage vs. distributions can make a huge difference in the amount of taxes you pay on the same income.

In the U.S. our laws and tax system are designed to benefit some people more than others. I hope this isn’t a surprise to you. When some people say “the rich” use “loopholes” to not pay “their fair share” they aren’t necessarily wrong. What they don’t see is “the rich” are people at all different income levels. The “loopholes” are laws and regulations passed by members of both parties over decades. Those “loopholes” are often the result of lobbying by certain groups and your average Congressman would say are designed to push people do things the government deems important.

Regarding “their fair share” is simply political rhetoric that is used during elections to create envy in one group vs. another so a politician can get elected. It has been happening in all countries for thousands of years and is unlikely to end anytime soon. The reality is your fair share is based on how you structure your affairs, so you pay the lowest legal amount of taxes possible.

People that are self-employed entrepreneurs have a lot more control to legally arrange their business to pay some of the lowest amount of taxes possible while enjoying a great life. If you know what you are doing you can shift income to children, who pay a lower tax rate, write off a myriad of deductions, restructure income to be paid differently, i.e. payroll vs. distributions, etc. While this isn’t meant to be given as either legal or tax advice as of right now here are certain ways self-employed people can control their income.

Retirement

When you work for an employer you must utilize their retirement plan in most cases. It is true you can contribute to IRAs outside of your employer and certainly something I will talk about in other articles. For the purpose of this discussion just know that many employers have investment plans with high fees and terrible investment choices.

Self-employed business owners can create their own retirement plans. They control the investment choices and fees paid. I personally have created my own 401(k) plan that I am very happy with. I control everything from the investment choices to the fees I pay. I can also control how money is paid into that plan based on how I structure my compensation. I can also easily move those savings into different buckets over time in a way I completely control. These are all things that are often denied to W2 wage earners working for an employer.

Again, refer back to my story earlier about the small business owner that contributed $57,000 to his 401(k) in one year. If you work for an employer the max you can contribute is only $19,500 unless you are over age 50 and then you get a little bonus “catch up” contribution you can make, which as I am writing this is $6,500. Our small business owner was able to more than double this due to running his own business! By utilizing legal, but different rules than your typical wage earner has access to he was able to create a very beneficial situation for himself and save a mountain in taxes.

You can also self-direct your retirement plans because you set them up. Self-directing your plans is simply you deciding what to invest in. I am NOT referring to picking one ETF or mutual fund over another or a stock vs. bond. I am talking about completely flipping the script and investing in things like real estate, mining stocks, precious metals, private notes, hard money loans, private equity, cryptocurrency, alternative energy, and a host of other incredible alternative investments. These investments can create incredible returns and grow your retirement savings in large amounts very quickly when you know what you are doing. You can also do it in tax advantaged ways where you defer or eliminate the taxes you pay on those returns.

In addition, self-employed small business owners can plow a lot more money into retirement plans than any W2 wage earner can. Again, this is outside the discussion of this article, but will be explored in more detail later. In the meantime, I would suggest you investigate the work of Mark Koher. I have a profound respect for his work in this area. Mark is both a CPA and Lawyer that specializes in this area. He has written several good books that I highly recommend. He also has some fantastic online classes, a YouTube channel and great podcast.

Expenses

Items that you are legally allowed to deduct as expenses in a business are not deductible to W2 wage earners. One example is investments to boost future earnings. Investments in education in the form of degrees, seminars, and online classes are deductions to a small business owner that are paid with pretax dollars. W2 wage earners pay for many of these same expenses with after-tax income or beg their supervisor to pay for them.

Business mileage can often be structured in ways that make your car a deduction. These deductions can become quite substantial over time. W2 wage earners often don’t have this ability. Their trip to and from work for example is not deductible. To a small business owner, it is. Driving to a meeting with a client is typically not a deduction for a W2 wage earner and many times, not even a reimbursed expense, but to a small business owner, it is. Again, there are laws, regulations, and rules that apply to this and you need to have a competent CPA guide you but suffice it to say it is possible and legal.

If you have a home-based business part of your mortgage and utilities for your home can become a tax deduction. Part of the improvements to your house can possibly become a tax deduction. This is wholly denied to the W2 wage earner, even if they maintain a home office.

Other items like cell phones, Internet connectivity, vacations, dining, subscription services, home office, medical expenses, many types of benefit plans, and a host of other items become expenses to the small business owner that are paid for with pretax dollars. The wage-earner pays for these with after-tax dollars.

While I don’t want to turn this into a tax article the point to take away from this is that small business owners have a lot of control over the taxes they pay. It is legal but will often entail that you use a knowledgeable CPA and take the time to educate yourself on how to do it. Here are 2 books I have personally read that I think are good idea generators and in conjunction with a CPA will benefit you:

Benefit Plans

As a W2 wage earner you typically get the benefits your employer gives you and in some cases those may be paid for with pretax dollars, but in many cases they are not. As a self-employed business owner, you create your own benefit plans to suit your specific needs and in almost all cases pay for them with pretax dollars.

Benefit plans could include medical reimbursements, legal plans like Legal Shield, identity theft protection services, and many others. You own the business and you can create whatever benefit plans you want to offer to employees. Obviously, there are rules surrounding these and how they must be administered and documented, which is where your personal education and a CPA can help, but the amount of control you can administer over them vs. what a wage earner is offered is second to none.

Income Structuring

As a W2 wage earner you have one type of income. It is taxed the same way to the last dollar you earn. You may also get a bonus at the end of the year, but you will find that is often taxed at an even higher rate. You might be able to divert some of this income into a retirement plan as previously discussed, but largely the structure of this income is outside your control.

A self-employed business owner with the right corporate structure can arrange his income streams in a way that minimizes his taxes. You can control how much of your income is paid in the form of wages vs. other forms. These tools are not available to a W2 wage earner. I would recommend the books listed above and a good CPA as ways to learn how this is done legally. For our purposes here suffice it to say it can be done and it is to your advantage to figure out how.

Income Risk

I have laid out a very positive picture of self-employment and I believe it is and have lived it personally for almost two decades. However, some W2 wage earners may quickly point out that they get a steady paycheck every week or two weeks. They might argue that their income is very predictable and dependable. It is, until it’s not. With W2 wage being your primary income, you can lose 100% of your income in the blink of an eye if you lose your job. If your spouse is working you might only have a 50% loss in your household income, but that is still huge for most families.

Early in my career I have been on the receiving end of this job loss more than once. It is what finally convinced me to go start my own business. All it takes is a corporate merger, a recession, an angry boss, or a jealous colleague sabotaging you for you to find yourself unemployed in a heartbeat with no warning and possibly no severance or unemployment depending on the circumstances.

As a self-employed freelancer this risk can be largely mitigated. Certainly not eliminated but mitigated. You can structure your business to have many clients so that the loss of one or even a few clients will not damage you. You can set up multiple streams of income that come from a diversified number of sources. You can, and I would advise, to do both.

For example, if you are a freelance web developer you could have the following income streams coming in each month:

  • Project Fees
  • Retainers and Fees
  • Affiliate Income
  • Hosting Fees
  • Maintenance Fees
  • Software Leasing Fees

If you spread these income streams over several clients, services, and accounts the chances ALL of them vanish at one time is virtually impossible. If you run an eCommerce site, you could conceivably make sales all over the world (much easier with digital products) and the chances all your sales stop at once is again nearly impossible. If you are a blogger you might earn fees from:

  • Ad revenue
  • Online courses
  • Affiliate sales
  • Product sales
  • Consulting
  • Coaching

Again, the chances that all these income streams dry up at once is nearly impossible. As an entrepreneur it is much easier to create multiple streams of income and you should. As a wage earner ALL your income comes from ONE source that can disappear instantly without warning.

There are other small businesses outside of technology that also have similar advantages. There is someone I follow that used to flip couches for a living. I didn’t even know that was a thing, but this guy figured it out and made a great living doing it and the chances he would not find couches to buy or sell all at once was minimal. Another entrepreneur I have already mentioned has a handyman business spread across multiple clients. Over the years I have met writers, mechanics, and other self-employed, non tech workers that have all the same advantages. I even met a guy that flipped cars for a living.

Conclusion

If you read certain statistics, you will get the impression that small business ownership is high risk with a high probability of failure. That is certainly possible if you get into the wrong business or make a series of poor choices or just have a streak of bad luck

The upside to entrepreneurship is worth the risk. Freedom, high income, tax advantages, income protection, and the ability to work on projects and with people that inspire you are just some of the advantages. The wage earner has false job security and very few, if any, of the other advantages that small business owners have.

Disclaimer

The information contained within this website is provided for informational and educational purposes only and is not intended to substitute for obtaining legal, accounting, tax, or financial advice from a professional tax planner or financial planner. Full disclosure

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