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9-5 vs Owning a Business

Choosing between staying in a 9–5 job or building your own business isn’t just about lifestyle—it’s about how the IRS treats your income. Structure, documentation, and execution can dramatically change your after-tax outcome. Let’s break it down.

The Tax Reality of W-2 Income

If you’re working as a traditional employee, your paycheck is straightforward:

  • Fully Taxed: Your income is subject to federal income tax and FICA/Medicare (15.3% combined).

  • Few Deductions: Since the 2017 Tax Cuts and Jobs Act (TCJA), unreimbursed employee expenses aren’t deductible.

  • Limited Planning Flexibility: You can’t time your income or deduct everyday expenses like travel, home office, or meals.

How do W-2 employees build wealth? Through employer benefits like:

  • 401(k) contributions

  • Health Savings Accounts (HSAs)

  • Employee Stock Purchase Plans (ESPPs)

Valuable? Yes. Flexible? Not really.

What Business Ownership Unlocks

Owning a business opens a toolbox of tax strategies that simply aren’t available to W-2 employees.

Entity Design Matters

  • LLC taxed as S-Corp: Separates your income into wages (W-2) and distributions.

  • Result: You only pay Social Security and Medicare on wages, not on profit distributions—potentially saving thousands in self-employment tax.

Deductible Systems

With proper documentation, you may deduct:

  • Home office expenses

  • Business vehicle strategy (with mileage logs or actual expense method)

  • Augusta Rule (renting your home to your business up to 14 days tax-free)

  • Health plan integration for you and your family

  • Retirement plans at the business level (Solo 401(k), SEP IRA, or cash balance plan)

The IRS allows these only when they’re substantiated, reasonable, and documented.

Example Scenario

Imagine two professionals—Alex (W-2 employee) and Jordan (business owner).

  • Alex (W-2): Earns $120,000, pays full FICA/Medicare on every dollar, plus income tax. Wealth-building relies only on a 401(k).

  • Jordan (S-Corp owner): Also earns $120,000 net, but pays themselves a $70,000 salary and takes $50,000 as distributions. The distributions avoid self-employment tax, saving around $7,500. On top of that, Jordan deducts home office expenses, vehicle mileage, and sets up a Solo 401(k)—creating even more savings.

The same income, two very different tax outcomes.

The Transition Playbook

Thinking of making the shift? Here’s a phased approach:

Phase 1 – Start Simple

  • Launch a side gig through an LLC.

  • Keep business and personal finances separate.

  • Set up an accountable plan to reimburse expenses tax-free.

Phase 2 – Elect S-Corp Status

  • Once your net profit supports wages plus distributions, file S-Corp election.

  • Document “reasonable compensation” using market data.

  • Run payroll and pay yourself formally.

Phase 3 – Advanced Planning

  • Add a Solo 401(k) or cash balance plan for bigger retirement savings.

  • Write formal policies for reimbursements and benefits.

  • Hold documented board meetings (even if at your home under the Augusta Rule).

Pro Tip: Use a cadence—monthly closes, quarterly estimates, and year-end reconciliations—to stay penalty-safe and audit-ready.

Why Documentation Wins

Business deductions are powerful, but without records, they collapse under audit. The IRS looks for:

  • Fair market rates

  • Written policies

  • Contemporaneous logs (vehicle, home office, board minutes)

  • Third-party benchmarks

Substance over form always wins.

Conclusion

  • W-2 employees rely on employer benefits to build wealth.

  • Business owners engineer structures, deductions, and timing to reduce taxes.

  • Both paths work—but the business path requires stronger planning, documentation, and integration.

👉 Thinking about shifting from 9–5 to business ownership? Contact Guerrero CPA at 210-490-7100. Our team integrates tax, bookkeeping, payroll, and advisory so your strategy isn’t just designed—it’s executed and defensible.