How many of you were taught in school that if you pay yourself a minimum wage and make up the rest as a dividend/bonus you can avoid paying a significant amount of tax (legally)?
Or how many of you were taught how to become "employable" so that you can earn the same amount of money and pay considerably more tax, unavoidably - because you aren't in control of your own finance.
How many of you were taught to open a bank account as a good way of "organizing your finances" (read: filling the pockets of fat men).
How many of you were taught anything about running your own business and being in control of yourself and your securities?
There's a reason this isn't taught in public schools folks - it's because the people at the top want more for themselves and less for you. They don't care about you - except when you're gullible enough to believe you're making a choice when voting season arrives.
The poor are poor because they think "that's just the way it is," and continue about their lives. It's only when you realize that's not the way it should be, because you're being fucked, that you start to do something about it and make yourself.
Then there's the moral effect. You either see the need to do something to change the system, and remain poor - or you accept it, and realize that the best way for you to make more money is to keep poor people poor (and gullible) - thus prolonging the system.
There's a lot to be said for that. If somebody had really sat down and hammered me on the power of compound interest and taught me a little bit about the capital markets, when I was, say, 14 or so... I think I would have made a lot of decisions differently and would probably be better off today. Although, to be fair on this point, I'm not sure it would have helped, because I can't - in retrospect - say that my 14 year old self would have taken those lessons to heart. You think about time differently when you're young... the idea of saving for "the future" and building wealth slowly... would I have appreciated the idea of Dollar Value Averaging back then? Hmmm... hard to say.
But anyway, I agree with you in principle, sparkie. What we're taught about how the world works, when we are young, is tremendously influential.
I only really discovered the advantages of creating my own business when I was around 23, I'm 25 now. I also got into a significant amount of debt in order to get a degree to make me more "employable" - and I'm still paying it back.
I'm perhaps most irritated by this because I'm mostly self-taught (in computer science) and university did very little for me. I should've studied business instead, but probably like you suggest, I would've considered that idea incredibly boring at school leaving age.
Boredom aside though, I do wish I'd learned more about business and life in general during school. I'm still trying to learn my way around the system now, but there aren't enough hours in the day. I'm sincerely grateful for the people who've taken the time to explain things to me anyway.
Maybe what we need is less of a udacity for coding and one for business, expressed in a way anybody can understand but not as rigid as a bschool or mba program? Reading the Thiel lectures for instance is very educational but without the basics how do you apply something like that?
You're the guy behind PersonalMBA? Awesome, I have the book and I love the site. I haven't put as much time into it as I should, as I've been too busy with the nitty-gritty, day-to-day "stuff" of doing a startup.
I do fully intend to get through the Personal MBA stuff eventually; but right now, I'm spending more time with the stuff from Steve Blank, Eric Ries, Ash Maurya, etc. :-)
> I also got into a significant amount of debt in order to get a degree to make me more "employable"
There lies the rub between many of us and higher education. Making you more employable is supposed to be a side-effect of college, not the end goal. I found that the people who went to school so that they could write down that they did so got exactly what the came for and not much more, while those of us who were there to learn got what we came for. It's an old idea, but true that what you get out of education depends on what you put into it.
why do you think business school would have helped you?
From my experience with business people? those with degrees seem to be generally of less skill than those without. (maybe it's just that if you are good and have a business degree you are high enough I don't encounter you? Possible.)
I don't see this correlation in computer science; I have no degree, but I certainly don't think less of people that work alongside me that do have technical degrees. Usually (but not always) it's obvious that they learned something that I missed.
Well, any school obviously helps you learn if you don't have a mentor or otherwise to help you sieve through the information. It's not like I can just walk into a library, go to the business/accounting section, and become an expert once I've read every book on the shelf. You need a way to manage what you're taking in, and courses help with that.
It doesn't need to be an academic course though, gaining the experience through work is good too, and I'm guessing that's what you meant about the "less skill" of graduates - their lack of actual experience.
Unfortunately for someone who didn't really know any accountant or business person until recently, I had no knowledge or confidence of getting my foot in the door, but if I'd studied the subject back in school, I would've been more competent earlier.
>Well, any school obviously helps you learn if you don't have a mentor or otherwise to help you sieve through the information.
I don't see how that's obvious at all.
I mean, I have a reasonable understanding of the creation side of business, and I can do straightforward sales; That side of things is easy enough to learn via trial and error.
Now, obviously, that's not /all/ there is to business, and maybe b-school teaches you about the bits I don't understand. But from a pure "you shall know him by his fruits" perspective, antidotialy, people with MBAs tend to be less successful (at sustainably growing the business... not at getting paid) than people without.
But yeah. as a small business that gives customers products or services in exchange for money? the most valuable thing you can learn is something about the product or the process that creates the product. The most valuable thing a small company has is the owner's labour. I mean, even with the ridiculous $150K/year salary numbers I hear friends throwing around these days... if I was working for someone else? I would have quit yesterday. (well, I would have gotten another job first, but... that has never been difficult for me.)
Compound interest only works when the interest paid exceeds inflation. Your money is simply rotting otherwise and would be better invested in something that's appreciating at a more rapid rate. Maybe that's wine or stocks or a house.
Your parent's generation had savings accounts that paid actual interest. Today you get a token 0.25% on a good day. With the prime rate being so low there's not much to be made by leaving your money sitting around.
As much as it's important to save money, it's also important to not save too much. Living a life of frugality in the hope of having a happy future is the deferred life plan and for many it never pans out.
Spend what you need to have an enjoyable life now and if you can save, by all means. Life within your means and spend wisely, but don't be such a cheapskate in the hopes that your accumulated pennies will somehow make you a billionaire some day.
Agreed. I only pointed out compound interest as an example of the kinds of tools that kids aren't really taught about (well, I wasn't, at least).
The thing is, I did actually pick up a book on stock investing as a teen... one more of my "library book sale" pick ups, but I skimmed through it, but the value of investing and taking advantage of the capital markets didn't "click" for me back then. Also, considering this was in the 80's, far before there was E-Trade or Sharebuilder or anything of that nature, the markets didn't seem very accessible to a poor kid growing up in rural NC.
At least that's one advantage we have today... something like Sharebuilder is a nice way to dip your toes in the water.
For better or for worse, we're in the era of "DIY" investments. You can't just dump your cash in a bank account, mutual funds, or write a cheque to your broker and expect to make money like was done in years gone by.
Now you need to be educated. You need to know the tools at your disposal and how best to make use of them.
My advice to anyone looking to invest is to first read up on gambling. Any book worth reading spends a good chunk of time explaining one thing over and over: bankroll management. For investment this is the same idea. Don't over-commit.
I'd also advocate reading on gambling scams as there's far too many dodgy investments out there promising impossible returns or companies with a "business plan" that's so full of holes it whistles when it moves.
Perhaps people who grew up in an environment filled with mistrust and the constant risk of thievery would be better prepared for investing in the stock market than most.
> How many of you were taught in school that if you pay yourself a minimum wage and make up the rest as a dividend/bonus you can avoid paying a significant amount of tax (legally)?
You shouldn't do that, it's not permissible under current tax rules… IRS requires that officer shareholders be paid a reasonable salary, and if you're making enough money to pay dividends, minimum wage will be hard to justify as "reasonable." I'm not sure how paying bonuses will help with tax avoidance as those are taxable like regular wage income.
IRS only applies to US companies. Each country has it's own different loopholes that allow you to pay less tax if you're earning more. The big corps pay far less tax than they should.
Note to term, "tax avoidance". "Tax evasion" is illegal, but there are plenty of legal ways to avoid tax, many of which I'm not aware of myself, but will be grateful for anyone willing to share.
And that's a big part of it - people don't share the knowledge - it's "insider" knowledge, and you aren't in the club. The fewer that know, the more money those who do, can make.
In Canada, the minimum wage + large dividend payment system is allowed and encouraged. Encouraged because it's a transparent way of declaring your income and earnings without using any complex loopholes to bypass the system. Encouraged because:
1) Having your own company is more risky as opposed to a Permanent employee role in the government's eyes, hence more opportunities to pay less taxes
2) Companies are far more likely to work towards creating employment than individuals working for companies, benefiting the economy
3) Dividend income is taxed at a reduced bracket to stimulate investment, regardless whether you're investing in your own company or getting dividends from a large public corporation by being a shareholder
10 years of filing corporate taxes, having every accountant follow this practice, and an official audit with no complaints shows the Canadian Revenue Agency has no issues with this system.
Hey, thanks for your input. The Canadian system seems similar to the UK. Every accountant is doing this, but there just doesn't seem to be an openness about it. It seems you only know how to do this if you're an accountant, or know an accountant - which was the point I was trying to get across in my original post - you aren't told this in school - they only tell you how to get a job, where none of it applies.
It's extremely open. If you're in the position of running a company, either you find out it's a good idea, or you get an accountant, who will tell you it's a good idea.
Sure, they don't teach you it at school, because most people at school won't start their own companies.
Those are just few of the tax avoidance schemes that come to light - which it should be noted are not necessarily illegal. The reality is that the rich and famous are involved in these schemes - earning big money and paying less tax than hard working, honest men.
The government doesn't take the necessary steps to put an end to these kinds of schemes in any haste - probably because they're involved in many themselves, along with their friends. If everyone was doing it, the schemes would be closed. I therefore recommend everyone do it, when legal.
I suggest you read the article more carefully. The comedian in the article is being investigated for using a tax shelter to evade British taxes. If you read more about the K2 tax shelter, you will learn that British tax authorities consider it to be illegal (obviously, taxpayers using the K2 do not) and are launching enforcement actions.
The article doesn't say K2 is considered illegal, rather, it clearly states "legal, but aggressive." It does say the scheme is under investigation, but it's not declared illegal yet. The icebreaker one is.
My linking to the article wasn't just to point out these specific schemes, but more to just highlight the scope of tax avoidance/evasion. There are many loopholes that get abused, some get fixed, although not always in a timely manner.
I'm not recommending you defraud your government, or do anything illegal - I'm recommending you do the same thing that every big corp does - pay the minimum tax they are required to by law, and no more.
People are led to believe that the richest pay ~40-50% in tax, or whatnot depending on where you are - but that couldn't be further from the truth - they generally pay less (as a percentage of their total earnings) than the middle or working classes.
You know, when these bankers pay themselves a $9 million tax free bonus at the end of the year - are they defrauding the government?
Work it out, say a banker is on a nice $1m salary, which he pays 50% in tax, but pays zero tax on his fat $9 million bonus.
I'm less naive than I was a few years ago since learning somewhat how the system works.
1) Perhaps you missed the part where I said IRS only applies to US? Tax rates do differ in different countries, if you weren't aware. That's one of the major tax avoidance methods - do what you can offshore, wherever you benefit by paying less.
2) Again, depends where you are. While all bonuses may not be tax free, they are usually taxed differently to income tax anyway - such that less tax is paid. Why do you think people pay bonuses rather than just increasing salaries?
3) I wasn't claiming otherwise - my claim is that the rich don't aren't paying more as a proportion of their total earnings, which is what is claimed to be the case by the system.
Whether the world is out to screw you or not I'd debate. It's more like the world is out to get as rich as possible, and you get screwed as a side effect.
1) Perhaps you missed the part where I said IRS only applies to US? Tax rates do differ in different countries, if you weren't aware. That's one of the major tax avoidance methods - do what you can offshore, wherever you benefit by paying less.
If you live in the US and you make money, you owe US taxes on the money, regardless of where the company is.
2) Again, depends where you are. While all bonuses may not be tax free, they are usually taxed differently to income tax anyway - such that less tax is paid. Why do you think people pay bonuses rather than just increasing salaries?
As others have pointed out, bonuses in the US are taxed as ordinary income, and they're taxed at the same rate or higher (!) than ordinary income in the EU. Take a quick Google trip through a search of "banker tax EU" to come up with some real doom and gloom there.
3) I wasn't claiming otherwise - my claim is that the rich don't aren't paying more as a proportion of their total earnings, which is what is claimed to be the case by the system.
This is simple. Rich people have more long-term capital gains and less ordinary income. It is 100% not because of bonuses.
You have now suggested two forms of tax evasion: falsely allocating income to "dividends" and using offshore tax shelters. Please stop trying to give tax advice.
Bonuses are income. They are taxed as ordinary income (or the equivalent of ordinary income in E.U. nations). Bonuses are not given lower rates; if anything, certain types of bonuses are subject to higher rates than ordinary income. Companies pay bonuses because bonuses are discretionary, while salaries are contractual. In other words, giving a bonus one year does not commit them to paying the bonus again the following year.
If you're taking my points as advice, you probably deserve to be screwed. I'm not trying to give it.
Falsely allocating dividends, using offshore tax accounts are what big companies are actively doing, and many getting away with it. And yes, these include your favorite tech companies and such. (http://www.ibtimes.com/articles/334737/20120429/apple-avoid-...)
The banking secrecy in some countries is the real enabler of tax evasion though - because corporations can simply fudge the numbers to reduce the tax bill.
Distributing profit as dividends is not "falsely allocating income". The only issue is whether you have to pay yourself a reasonable salary or whether minimum wage is sufficient.
Almost everything you wrote is false. Not all bonuses are income, they may or may not be taxed, they may or may not be subject to higher taxation than ordinary income. You have a very US-centric view of the world.
Of course my comments are US-centric. Hacker News is a US-centric forum.
Distributing profit as dividends is "falsely allocating income" if you are not paying yourself a reasonable salary, to the extent that you have redirected salary income to dividend income. Once you do this, it is no longer up to you to decide what a "reasonable salary" is. The IRS (or the local tax authority, if not in the US) will decide that number.
Most forms of bonuses are income in: 1) the US, Canada, China, Australia, the UK, France, Spain, and India. There are various exceptions, but the general rule in the nations where most people conduct business is that bonuses are income. As income, bonuses are taxed at the same rate as income is ordinarily taxed in those nations. In some nations, certain types of bonuses are subject to a higher rate of tax than the ordinary income rates. If bonuses were not taxed, or were taxed at lower rates, most income would be paid out as bonuses.
Do you really think the average business owner makes more as a business owner than they would as an employee? I don't have the statistics at my fingertips, but I'd find that surprising. I know I'd be making 3x-5x what I'm making now if I was working for other people.
Yeah, running a business means that you have a possibility of making a whole lot of money, and yeah, if you have the contacts to get investors to give you money in a situation where you get paid well if things go well and the company closes (with no fallthrough to you) if things go poorly, sure, you are doing pretty good; but that's not how most real businesses work.
I think you're doing it wrong. I quit working for a company about a year ago and am on course to make 2.5x what I made last year.
A small business should never be run in such a way that the employees are making more than the owner. How would any business work that way?
People typically pay a premium for a temporary service rather than employing someone full time. That is how you make money. It is why I pay a plumber a crap ton when my pipes break because it is still cheaper than employing one full time.
What business are you in that causes you to make a third of what you would make as an employee doing the same thing?
You need to take your total compensation into account when figuring how much you're making now vs. how much you were making as an employee. Consider the following things an employer pays to/for you in the US:
-OASDI contributions
-401k match
-Stock
-Generous portion of health insurance premiums
-Vacation, holiday, and sick time
In a tech business with an office and Valley-level benefits, the all-in cost for an employee is ~2.5x their base salary. Here [1] is an old article by Joe Hadzima talking about how this is figured.
>A small business should never be run in such a way that the employees are making more than the owner. How would any business work that way?
I don't see anything wrong with that; as the owner, the upside accrues to me, so it makes sense that I'd be willing to work for less compensation in the short term. (I've been in situations where my compensation was negative while employees were getting paid. If you can't get investors, it makes a lot of sense, I think. For me, even living in silicon valley, after $40K/year or so, the improvements to my life brought by every additional dollar diminish rapidly, and as I'm in silicon valley, 3x-4x that is not unreasonable compensation for my skillset, even sticking with year+ long gigs; this is how I funded my company until recently.)
>People typically pay a premium for a temporary service rather than employing someone full time. That is how you make money. It is why I pay a plumber a crap ton when my pipes break because it is still cheaper than employing one full time.
That is not how I make money. Selling hours... is difficult to scale. My goal is to get into a situation where my capital (plus a little bit of scalable labour, or labour I can easily hire out because I've worked in the field my entire life and I can recognise good people) multiplies every year. You know, own some means of production. Become, as the communists would say, bourgeois.
This is part of why my marketing message is so consistently "we don't provide a lot of support" - I'm happy to accept a slightly lower (but still ridiculous, by investment standards) return on my capital if the labour bit becomes more scalable.
So yeah, that's why I'm willing to take a loss on my labour (or even on total compensation) - for the chance to have a business that grows without being limited by my labour.
I'm renting, essentially, unix servers, so while my capital equipment depreciates at a terrifying rate, my capital is my primary tool for generating revenue. (and as far as investments in capital go, the margin on VPSs is pretty high. A server will pay for itself in under 4 months, on average.)
I mean, the whole revenue of the company is about a quarter million a year right now, which is about what me and my full timer would get paid, combined, if we both went and worked for a local big company. (the lion's share of that is eaten by power and new hardware.) I know why I'm here; revenue doubles every year, and this is the sort of business where capital cancan make money with minimal labour, I mean, potentially I'm sitting on something that can double my capital investment every year. I mean, if I don't screw it up.
But yeah; if you are looking at a business that scales? this long period of not getting paid a whole lot is pretty normal. You go out and buy a retail store? a restaurant? etc, etc, - it's going to be a long time before you earn back the initial investment.
It's really only contracting/consulting where you make more from day one; and that's a great way to get your hands on some capital, but from my point of view, long-term? it's not nearly as attractive as having my capital do the work.
Now, I think I'm stabbing in the right direction, but it has yet to be seen if I'm doing it wrong. Certainly, if I sold today for 1x revenue (not at all unusual for small businesses) I'd have made less money for more work than if I had just done consulting for that time period and put the money in T bills or whatever. But if current trends continue; it doesn't take very many years before we're talking about real money. (now, such doubling never continues forever. But I don't need forever. I'd be dang comfortable with another 3.)
> How many of you were taught in school that if you pay yourself a minimum wage and make up the rest as a dividend/bonus you can avoid paying a significant amount of tax (legally)?
That's the one I don't get. At tax time, it's still income. It's not like that bonus/dividend is magically untaxed because it doesn't show up bi-weekly or monthly.
The rest of isn't taught because The Man wants to keep you down - it's because teachers aren't taught those things either (at any level) and most of them have enough on their plate just trying to satisfy state requirements. You make it sound like a grand conspiracy of old, rich white people and it's not.
What the wealthy do have that most of us do not is the access to resources and a bit more free time to use those resources because they're not scrambling for a dollar like the rest of us.
I generally agree on the rest of it, but I'll add this: sometimes you're so far down a hole that the existence of light or that someone gives a damn about you is not even imaginable. Sure, you may have people that will get your back in a tight spot, but that's a far cry from knowing people who can make your life materially and spiritually better and would willingly do so.
>There's a reason this isn't taught in public schools folks - it's because the people at the top want more for themselves and less for you.
While I agree with you that schools should do more to encourage people to own their own business, do you really think school curriculums in the US are decided by a shadowy cabal of the wealthy?
Whether to teach business and entrepreneurship would be almost entirely up to the local school district. There are thousands of them and each one is independent--that's a pretty far reaching conspiracy. I know members of my local school board, and I can assure you they aren't part of the "people at the top" trying to keep the poor man down.
The real reason people more people aren't self employed is that we've managed to link health insurance with employment.
Read/Watch "Manufacturing consent". It doesn't need to be a wide spread conspiracy. Once you get some kind of environment established people lower down the tree will perpetuate it themselves with no outside stimulus.
It sounds like you're talking more about things that could help middle class people. Very few poor people have issues that could be helped with "pay [themselves] a minimum wage and make up the rest as a dividend".
Sure it'll help the middle class with out current system, but the point was more about how all people should value themselves. Rather than selling your time in exchange for money (i.e., being an employee), you are better off exchanging your value for money. This should apply to any class really.
The reality is different for poor people, but my point was more about "what could be", rather than "what is". Trying to think about it in terms of the current system is flawed, because the current system is designed to enrich people.
If everyone was avoiding tax then the tax would need to rise, or the laws would need to change - this may or may not be a good thing to the masses - but it's certainly not a good thing to the rich - which is why they make sure it doesn't happen.
You got downvoted for saying it but honestly I would expect this philosophy of selling value to apply more to the poor since they're typically not able to make themselves look "employable" anyway. If you're selling a service or a product no one has to know if you attended a top university.
I hate these "it's the system" arguments almost as much as I hate argument ignoring the systemic issues entirely.
It's clear that in your world view, a bunch of rich, white "fat men" (read: Republicans, according to you) are controlling everything from banks to schools to everything else. I feel sorry for you. The world is not the gigantic conspiracy you've created in your mind.
What you have suggested is tax evasion. You must pay yourself reasonable rates, otherwise, you will be treated as evading employment taxes. For a white collar job, that means significantly more than minimum wage.
The penalties (higher back-interest rates and fines) for tax evasion are quite severe. Jailtime is also a possibility.
I've not suggested tax evasion - stop exaggerating.
The only point I've mentioned is one of tax avoidance, which is in common practice. I've not advised you to do it either, just making a point that it is done - the system is unfair - people avoid tax (legally), whilst you are paying your honest share.
And please, Americans - are you able to think outside of your own country and it's laws?
How many of you were taught in school that if you pay yourself a minimum wage and make up the rest as a dividend/bonus you can avoid paying a significant amount of tax (legally)?
Or how many of you were taught how to become "employable" so that you can earn the same amount of money and pay considerably more tax, unavoidably - because you aren't in control of your own finance.
How many of you were taught to open a bank account as a good way of "organizing your finances" (read: filling the pockets of fat men).
How many of you were taught anything about running your own business and being in control of yourself and your securities?
There's a reason this isn't taught in public schools folks - it's because the people at the top want more for themselves and less for you. They don't care about you - except when you're gullible enough to believe you're making a choice when voting season arrives.
The poor are poor because they think "that's just the way it is," and continue about their lives. It's only when you realize that's not the way it should be, because you're being fucked, that you start to do something about it and make yourself.
Then there's the moral effect. You either see the need to do something to change the system, and remain poor - or you accept it, and realize that the best way for you to make more money is to keep poor people poor (and gullible) - thus prolonging the system.