You are not making as much money as you think you are as a Private Investigator (or Process Server) because you don’t understand the real bite of Self-Employment and Income taxes!
Currently, in the U.S., self-employment tax is 15.3% of your profit.
If you have a day job, you probably recognize they take a pretty big chunk of money from your paycheck, but not 15%. That’s because your employer is paying about half of that! So you pay part of your Social Security tax and your employer pays part. It’s about a 50/50 split between you and your employer.
But… when you are self-employed, you are the employee and the employer! That means you have to pay it all! And that’s about 15% off the top of what you think is profit!
So if you think you billed out $150 to a client and he paid you $150 and then you paid your expenses, of, say $50, well… you think you made $100 profit!
If you’re budgeting as if you actually have that $100 to keep, save, make a car payment, mortgage payment or whatever… you are going to be way off budget because the government is going to take 15% of that $100 profit as self-employment tax!
That means you really only made $85!
And just to add one more slap to the face, you probably have to pay Income Tax on that $85!
If you are only in the 10% tax bracket, you’re going to pay $8.50 in income tax and that means your $85 “profit” is now only ($85-$8.50=) $76.50
So, in this example, your “$100” in profit is really only about $75 that you actually get! (Real profit.)
You need to know this!
You need to budget accordingly!
Otherwise, on April 15th you will get a tax bill for everything you’ve not been paying all year! And that’s 25% to 33%! OUCH!
How much do I need to set aside for taxes on my detective agency?
Here’s a rule of thumb if you have no idea what’s going on for your business financially…
Set back 33% for taxes.
One third of “what you make” needs to be saved to pay your tax bill.
Just something to think about as you build and grow your detective agency.
If you like that helpful tip, then don’t miss out on my free special report If You Want To be a Private Investigator Give Up… Unless You Do These Three Things. You can get it right here…
Committed to your success,
Larry Kaye, P.I.
P.S. – How you pay your taxes may be just as important! You may be able to increase your withholdings from your day job paycheck and that will help you immensely! And/Or you might need to pay Estimated Quarterly Taxes. But find out NOW so you aren’t burned at tax time!
P.P.S. – Obliviously I am not a tax guy, financial planner, accountant or anything like that so if you need financial or tax advice, go find a licensed professional! Duh.