Many nurse practitioners think that the biggest expense in their life will be their mortgage, child expenses, car payments, student loan payments and so forth, but that is not the case for an individual making any kind of significant income. Sure, if you are making $35,000 a year and decide to buy a $50,000 truck then your car payment will be the biggest expense in your life, but that is for fools. I am talking to educated nurse practitioners who SHOULD be making $100,000+ a year, therefore the BIGGEST expense in your life will be TAXES. Don’t believe me? Let’s run some hypothetical numbers assuming you are filing your taxes as a single filer:
Salary: $120,000 (realistic for most nurse practitioners, even though it should be much more…)
FEDERAL tax bracket: You will pay $14,751 in taxes PLUS 24% of whatever you make over $86,375
Social Security and Medicare (Employment Taxes): 7.65% of your income up to $147,0000. If you are totally self-employed, that number is 15.3%!
State income taxes: Whatever that is in your state. Only 9 states have no income taxes. Income taxes range from 1-13%.
Total taxes paid on your INCOME alone: Approximately 34%
$120,000 salary X 34% = $40,800
Take home: $79,200
This is just INCOME taxes folks… Now add on SALES taxes, PROPERTY taxes, and so forth… If you do that, now you are looking at an average of 40-50% of your money goes towards paying taxes. If you are in higher income tax brackets, it even gets worse… Here are a couple more examples:
If you are self-employed, then you will pay 15.3% towards Employment taxes! That is a lot of money….
If you are married, filing jointly with a combined income of $200,000, then you will pay $29,502 towards taxes PLUS 24% of anything over $172,750. Good luck if you are getting closer to $300,000…
If you are a single filer (myself), with an income of $200,000, then you will pay $33,603 plus 32% of anything over $164,925… This makes me nauseas sometimes…
Regardless, the point here is that you will be paying a SIGNIFICANT amount of money in taxes. When you add up all the taxes together (income, property, sales, etc.), you are looking at 40-50% of your money going towards taxes. Do you have anything else in your life that 50% of your PRE-TAX income goes towards? I doubt it, therefore taxes are the BIGGEST expense in your life. If they are not, then you are living WAY above your means and likely living paycheck to paycheck… but that is another topic.
So, what can the astute nurse practitioner do about this? They can lower their TAXABLE income through tax deductions and tax credits.
Typically, tax credits just directly reduce the amount of taxes you owe and are given by our government yearly. Think of child tax credits or tax credits you would receive for having solar panels on your house. While these can reduce your tax obligations, they won’t reduce them in a significant way for most of us as they are limited. They are great when combined with tax deductions though…
On the other side of the coin, tax deductions will reduce how much of your income is subject to taxes. It will LOWER your income tax bracket. Think of contributions made towards your 401k. If you max it out every year, you would lower your taxable income by $20,000ish and could potentially move your tax bracket from 32% to 24%. A big savings! The problem though, is that most people don’t take all the deductions they can, especially nurse practitioner business owners!
When you are 100% employed, the tax credits and deductions available to you are very limited… It can be difficult to obtain enough deductions to go over the standard deduction of $12,950 for single filers and $25,900 for married filers. Yes, you are given a standard deduction each year. If you cannot write off enough deductions to equal $25,900 a year if you are married, then that is the deduction you must take. There is nothing else you can do.
This is why you need a small practice or business. The last great tax haven left in this country is having a small business. Why? Because taxes are different for the small business owner. Read THIS article about the difference between taxes for the employed nurse practitioner and the nurse practitioner business owner. To sum it up: when you are a business owner, you pay yourself FIRST and then pay taxes compared to having taxes taken out of your paycheck first and you receive what is left over as an employed nurse practitioner. Additionally, you literally have hundreds of deductions available to you as a nurse practitioner business owner that you would NEVER have as a 100% employed nurse practitioner. But guess what? The business can be a very part-time one. It doesn’t need to be a 40 hour a week business. Hell, you could see patients for 2 hours a week through a small concierge mobile practice if you wanted. You just NEED a business of some sort.
Business deductions available to the astute nurse practitioner entrepreneur that are not available if you are strictly employed:
Business vehicle write offs (yes, you can deduct gas, maintenance, car insurance, and so forth).
Employ your children for $12,000 in tax free income.
Self-employed retirement accounts (you can put $61,000 a year into a self-employed 401k!).
Business meals and parties (yes, you can host a get together at your house and write it off in full).
Your graduate education.
Business trips and vacations.
Lowering employment taxes through utilizing an S-Corp election.
And the list goes on…
Every one of these deductions LOWERS your tax bracket more and more. What does this mean? You are paying for expenses that you would have normally paid for anyways but with TAX free money because it is a business deduction. Plus, it lowers your tax bracket. I know millionaires who have a tax bracket of 22% because they are poor on paper. Yes, YOU are paying more in taxes than many millionaires. Why? Because they understand the rules of the game. I write off dry cleaning and laundry when I go on business trips because I know about this deduction and take advantage of it. You can’t do that being employed…
The point of this article is to highlight that you will pay 40-50% of your money towards taxes as a six-figure professional. It is the BIGGEST expense in your life; therefore, you really need to try to lower it and that is best done through owning a small niche practice or business. Again, it can just be part-time… There is little risk in that! It could potentially save you tens of thousands of dollars a year in taxes. I know it did for me!
If you are looking for actionable advice and instruction on how to lower the biggest expense in your life, then be sure to check out The “How to Lower Your Taxes” Course that is currently on sale! There is a preview video on the course page, so watch that if you are serious about lowering your biggest expense in life!