The tax obligations of standard W2 employees and those of business owners are not created equal. Far from it in fact. Income taxes are essentially paid through the income that you earn. You earn money and a percentage of that goes to pay Uncle Sam. If you are currently a business owner, you probably already understand what I am getting ready to say, but if you are an aspiring nurse practitioner entrepreneur, then this will likely be news to you. So, how are taxes different for an employee vs. a business owner? It comes down to WHEN you pay your taxes.
Employees pay taxes BEFORE they actually receive the money they worked for. You work, you earn a certain amount of money, taxes are deducted, and then you are paid what is left over.
This is different for the business owner.
A business earns money, SPENDS the money, and then pays taxes on what is left over. They pay taxes AFTER they have spent their money. This is the key difference, and one you need to understand so you can legally reduce your tax obligations.
Everyone reading this is or has been a standard W2 employee. Your employer (or rather the IRS) takes a percentage of your income before your paycheck is issued to you. There is little you can do to get around this. It is one of the CERTAINTIES of being an employed nurse practitioner and is one of the reasons why you should start your own side hustle.
As an employee, you must live off your post-tax earnings. A percentage of what you earn you will NEVER see.
On the other hand, as a nurse practitioner entrepreneur or just a business owner in general, a large portion of your life is supported by pre-tax earnings. A significant percentage of what you earn you will keep, unlike the employee.
All the money comes into your business TAX FREE from the sales of products and services. This money sits in your business account TAX FREE and can be spent TAX FREE on business expenses. Once all the expenses have been paid (such as gas, insurance, cell phone bills, utilities, wages, etc.), you are then taxed quarterly or at the end of the year on what is left over. I just pay my taxes at the end of the year.
This is the advantage of owning your own business. You pay your taxes AFTER the money has been spent, not the other way around. It is literally one of the last great tax shelters left in this country. You are a fool for not taking advantage of this if you are making a six-figure income.
Some of you might be asking “Well, what can I spend the pre-tax business money on?”
You can spend it on literally thousands of different things. Check out the IRS code section 162. It outlines all of the deductions one can take for business expenses. Section 162(a) allows a deduction for all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. Yes, that is right, ANY trade or business. This is why you need a good accountant.
This is where the magic of owning a business happens. Not only will you be making more money being self-employed, but you will be making even more money by reducing your tax obligations! There are a multitude of various expenses that overlap into your personal and business lives. These expenses can be paid for by PRE-TAX business dollars. Guess what? These are expenses you would be paying for anyways with your POST-TAX dollars from your W2 employed position.
Everyone needs gas for their automobile.
Everyone needs a cell phone.
Everyone needs high speed internet.
Everyone needs insurance (health, auto, life, liability, etc.).
Every nurse practitioner needs to go on vacation, why not make it a CME or business trip?
These are just a handful of all the expenses that you will pay for through your business with PRE-TAX dollars. You will pay for these expenses FIRST, and then pay your taxes as a business owner. If you are employed right now, you will pay taxes FIRST, and then pay for your expenses. You need to flip that around, which is why you need a business.
If you are still on the fence about starting your own part-time practice or if you are a new business owner, I hope this short article outlines the importance of understanding how to utilize your business to LEGALLY reduce your taxes.
Even if you are a nurse practitioner who is content with being employed, you should still consider a small, VERY PART-TIME business, that you can do to generate extra income while also reducing your tax obligations. Think of a small niche side practice.
Go give a few IV infusions on Saturday mornings.
Host Botox parties.
Go to patients’ homes and give them stem cell injections.
The possibilities are endless. One small part-time practice could save you thousands of dollars a year in taxes if you understand this concept.