I recently received a “clearly feeling superior” type SMS text message from a would-be prospect that made me laugh out loud because there is 1 thing almost every employee doesn’t know.
The text? “I got a real job“ .. LOL.
Let’s make a comparison between someone who is just an employee and an employee who is also a part time entrepreneur. That way you will see why I laughed outload and understand the 1 thing almost employee doesn’t know.
What all employees know is clearly displayed above.
Too much stress, too high a workload, too little pay and more are a reality of having a job. But what is the 1 thing almost every employee doesn’t know?
Say you are an employee and you needed more income, so decide to get a part time job. You figure the $200 a week you will earn, which adds up to $10,000 for a year, will sort you out in a year’s time.
That is behind Door #1 as an option as long as you are willing to give up your weekends, in a year your finances are fixed. It sucks but it is better than owing money and being broke.
Since you are an employee going for door #1 (the part time job), you already earning full time income that you pay tax on. And let’s say that day job income puts you at the 30% tax bracket, for sake of argument. What are the implications of that?
Well, for every additional dollar earned part time, 30 cents goes to the Government. That means that $3000 of that $10,000 you will earn part time is going to be owed as tax.
Thirty percent of the weekends you will give up, will be worked to pay even more to the Government. And that is an ouch!
Such a full time employee with a part time job would actually earn $7000 net from giving up 50 weekends in a year.
Behind door #2 is another option for the money challenged. The difference is they decide not to moonlight in a job but, instead, start a part time business with almost no startup cost.
Let’s say the person y who went for door #2 also makes $10,000 during the year but from a part time business or side hustle. What tax will they pay no on that income?
Already door #2 is look much better, yes?
How is this possible? Why is door #2 way better than door # 1?
Let’s look at this carefully because there are all kinds of great benefits, not just paying less or no additional tax. We will get back to why the tax is lower in a bit.
One immediate benefit is this part time gig can be done from home. So there is no traveling to a part time job, which may save on travel expenses and wasted time traveling.
Any time wasted on traveling is time that cannot be spent with family or leisure activities – meaning; having fun!
Remember I said the person who took the part time job planned to quit after a year? That means they earned a net income $7000 and paid $3000 tax. How does that compare to what is behind door #2?
The part time entrepreneur does not lose their income after a year. Why? Because the customers accumulated in that first year are repeat buyers and thus are still creating income.
Remember, they are a full time employee too but chose as a side hustle to represent a manufacturer of consumable products. This manufacturer takes all the orders, collects payment, deals with customer complaints and returns, delivers those orders and simply pays anyone just for bringing them customers.
Ongoing income is still not the only thing that makes a side hustle superior to a moonlighting job or working over time, as you will see.
This style of business is like affiliate marketing but better, as it pays compensation for the lifetime of the customers. And there’s more about it that is smart than just that but that point alone shows you why it is better.
The income is not derived by trading time for money.
Oh, the person who takes door #2 also owns their side hustle business, even though they are representing a manufacturer. That means their business is willable or sellable, having value outside of the recurring income. And that beats a part time job 7 ways to Sunday!
Still think a part time job makes sense?
I like to coach employees to keep their job and focus on a side hustle to increase their income, as it is or can be far superior to moonlighting in a part time job.
Some people seek a better paying job and focus their time on that, which is fine but no employee should take a 2nd job (part time job) in addition to full time employment!
In addition, no employee should be without a side hustle either, which we will touch on but that is the 1 thing almost every employee doesn’t know.
The above income tax chart, produced by MDTAX, shows that for every dollar earned annually over $48,536 and up to $78,786 the person earning it pays the Government 29.65%. And, in the Province of Ontario, in Canada, keep in mind that this includes health care, as it is available to everyone.
So, that tax rate would be high in comparison to areas without health care included, like in the U.S.. But it is not when you realize that in the U.S. you have to buy health care insurance separately.
Assuming one is in that bracket, nearly 30% of extra income is paid to the Government on every dollar earned by an employee working over time or moonlighting at a 2nd job. But not so for people with a side hustle business.
You see, employees never get a tax write off for a portion of their cell phone bill, do they? Yet they will always have a phone.
Employees do not get to write-off a portion of Home Internet but most will have this expense.
Unless the employee has a home-based business, employees also do not get to write off part of their rent or mortgage, heat and electricity, and more.
It is easy for all of these expenses, that become write-offs when someone starts a home-based part time business, to add up to $10,000. And those write offs are applicable against any income.
That phrase is important; any income.
The reason why I am bringing this up is; even before that side hustle earns a dime, the person who started the side hustle is ahead financially!
These costs are often referred to as soft costs and create a paper loss, as apposed to a real loss (because one has those expenses anyway).
It is important to note that this paper loss is not the kind that most people relate to, which is the paper loss that happens when an investment loses value. That type is a loss on paper until AFTER the stock is sold – then it is a real loss.
There are other types of paper losses. And one is never a real loss and always puts you into better financial position, as you will see.
If the entrepreneur in the above example can write off $10,000 of expenses and their business earns no profit in its 1st year, they would pay less tax on their day job income.
An accountant will confirm this for you and that is the 1 thing almost every employee doesn’t know.
Now, in the U.S. the IRS and it’s Canadian equivalent, Revenue Canada, will not allow you to lose money in your home-based side hustle forever. But one or two years of no net profit – showing a paper loss – is allowed, especially if the part time income is increasing.
In the chart above, if the entrepreneur’s day job earned $58,536 annually and their side hustle had a paper loss made up of soft costs totaling $10,000, as in the aforementioned example, Revenue Canada would owe that side hustle entrepreneur a tax rebate of $2965!
In other words, a sharp part time entrepreneur who earns $58,536/year as an employee already made back $2965 they paid in tax “at source” (job income) just for deciding to open a side hustle business!
Sure, that business might make money too. And, if it does, this person can earn up to $10,000 without paying a dime of tax on this income because they have off setting tax deductible expenses – soft costs.
It is called a soft cost because it is not additional money that needs to forked out. If a side hustle required a start up cost to get going, that would be a hard cost and that I do not recommend. Why take a situation where you do not have enough income and make it worse by spending money/incurring a hard cost?
If an employee earning $58,536 took a job that paid $10,000 they would now have additional income of $7000, instead of $10,000 for the part time entrepreneur. And the side hustle entrepreneur is ahead $2965 the second they decide to open their home based business. Not much of a comparison.
By now I doubt you think a moonlighting part time job beats a part time side hustle business!
In a future post I will discuss what type of side hustles make more sense than other types and why.
Also, I just finished another blog post about home business that fits perfectly with “the one thing almost every employee doesn’t know” and I thought you might like to read it.
The new post is called; The surprising reason why everyone should start a home business.
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