Do you know how much money Lebron James makes…?
Hint: It’s a lot.
Hint: He’s a basketball player
Hint: Basketball is a sport…
Every year at tax time when I’m forced to actually distill the sum of a year’s work into a single number, gross income (gross indeed), I come face to face with the reality that Lebron James and I are very different people.
It’s a tough pill to swallow (because people are always saying how we’re so similar…).
But even though my number is about three billion percent less than his, I’m actually usually surprised by how much I made every year. Honestly… it’s generally more than it felt like I made.
I was commiserating with a fellow artist friend recently about that very fact and he agreed. He had had a particularly good year, and although he had ended up making 6 figures it didn’t really feel like the riches that he imagined it would be.
It’s not because the money is slipping between our fingers… it’s because as sole proprietors of a small business our ‘gross income’ isn’t remotely the same as our ‘take home pay”.
Different than the average bear
The average salaried employee gets paid a certain amount a year. There are deductions and taxes that come off of that, but it’s not hard to get to a number that reflects their ‘take home pay’ (the amount of money they have to spend on housing, food, and various exotic pets).
For the average freelancer, however, your personal and business money is all tied up into one number. So even though you made 50,000 dollars this year… that doesn’t mean that you ‘took that home’ because a bunch of that money went right back into your business.
Why does it matter?
The numbers that we see on paper affect our decisions. They also really affect the way that we’re treated… not about town… but by banks or mortgage lenders.
For example: a mortgage lender is going to look at your entire income and figure out how much you can afford to borrow.
But it’s not the truth, because a big chunk of that income isn’t available for servicing a mortgage… it needs to be in your business to keep things running and keep you earning more money.
Knowing what you actually ‘take home’ helps you figure out what you have to spend on rent/mortage payments, food, and sweet deep v-neck sweater vests.
Figuring out your ‘take home wage’
There’s actually a really simple way to find out how much you’re taking home.
Grab your most recent tax return (the one that was lying to you about your income just a second ago).
Since the government lets you DEDUCT all of the money that you directly spend on your business, it’s really easy to see how much money you spent on business last tax year, and how much was left over.
What you want to look for is the line that says: Taxable Income (it should be line 260 if that helps).
Your taxable income is what’s left after all your various deductions have been applied (business ones and the Canada Pension Plan). What hasn’t been deducted from that number… is your tax. So there’s even more money to come off yet.
But that’s the number that you can use to more easily compare yourself with others when they talk about making “50,000 dollars a year” or “8 bajillion”.
My ‘take home pay’ bums me out….
It’s way less than what I thought I was making…. In my case it was just over 60% of my gross income. And remember, that’s before my 5 thousand dollar tax bill.
But you can’t budget with bullshit. And a business takes money to run.. money that simply can’t be used to cover this month’s rent shortage, otherwise I’m going to find myself unable to get to the next audition, or have the next voice lesson.
When you’re trying to figure out what you can afford to spend (on something non-business related) don’t make the mistake of using the number that the bank will look at…. Make sure that you’re making that decision based on the amount of money that will actually be available to you.
It might be less than you thought, but hopefully by avoiding the lie you’ll save yourself from being way more bummed out in the future.