Latest / The Jon Sanchez Show / The Salary Penalty: Why W2 Workers Pay More in Taxes
Transcript
- Jon G. Sanchez, CEO: Good Wednesday afternoon to you. Welcome to the Jon Sanchez Show on News Talk 780K or should I say happy? the day we all dread, April the 15th. almost here. You got till midnight. Put that money in the mail or put the tax return in the mail or however you decide to do it, electronic filing, et cetera. But it is April the 15th, isn't it? That prompts me to bring up a great topic for you this afternoon. After go through the stock market recap and what a day it was, what a recap I'm going to be able to give you because it was a record setting day for the NASDAQ and the S &P 500. That's right. Can you believe that? After everything we've gone through. We closed at record levels for those two major averages. Little bit light on the Dow side of things, but record-setting day for the NASDAQ and the S &P. Gonna give you all the reasons behind it. moved in your portfolio today probably, et cetera. But let me tell you about my topic this afternoon. I'm give full credit to Bloomberg. Love Bloomberg, love the information. know many of you don't like it because it's a left-leaning. a new source, but for those of us in the industry, we pay a lot of attention to it. They do an incredible job of reporting and a really great job of various types of stories. That's what I thoroughly enjoy about it. Definitely worth the subscription that I pay for it. But let me tell you what I came across. it was yesterday, and I've saved this topic obviously for today, because of course it being April the 15th. And you're probably sitting back going, I can't believe the amount of taxes I had to pay. It's not fair. Why did I have to pay so much? ⁓ What my accountant do wrong? You know, not fair. Why do people that make millions of dollars pay less in tax than what I do working a W-2 job? Well, what many of you may not realize, I'm not saying that from a criticism standpoint, it's just things have changed a lot, like everything in our lives these days. Things have changed a lot with the big, beautiful tax bill. And this is the first year that certain of professions pay a heck of a lot more in taxes than other professions. So as I was... Perusing Bloomberg yesterday, I came across this story that I'm going to be focusing on after my stock market recap. the title of the story is The Salary Penalty, Why Trump's Tax Bill Hits a Banker Harder Than a Plumber. I mean, what a headline that is. The tax bill hits the banker harder than the plumber. So it caught my attention. And I started going through this article and I went. ⁓ my gosh, what a phenomenal topic for the show on April the 15th. Because again, as you write your check to the IRS, or for those of you in California or other taxable states, writing your check to the IRS and to your state. You're probably not too happy about it. Well, after today's hopefully I can enlighten you a little bit about the way that you are making money therefore the tax liability or lack thereof that you're susceptible to. We've all heard the adage, it's not what you make, it's what you keep. And as I've always emphasized to our clients, and I think I've mentioned it many times on the show over the years, tax planning does not happen. obviously in the year the taxes are due. You don't plan for 2025 the calendar rolls on January the 1st. Matter fact, you don't even plan for your taxes in October or November in this example of 2025. Tax planning, especially if you have any wealth, occurs on a 12-month basis. And I'll be honest with you, it's almost unfair. When I look at tax returns and guide my clients tax strategies, the amount of taxes that people have to pay when they are retired, not in all cases, just in a small case of the retirees, but predominantly where my heart bleeds is for those of you, which is the vast majority, that work for someone else, that you're a W-2 employee. That doesn't say you work, you know, say that you work less or harder or anything else than the self-employed individual. But you see, as you're going to learn this afternoon, tax codes are just definitely slanted towards those of us that self-employed. And for those of us that have level of knowledge and education and are self-employed, the pendulum really swings our direction. I'll give you real brief example. If you fit a certain criteria, those of you that are business owners, and I hope you take me up on this offer, if you fit a certain criteria, meaning a certain age of you as the owner or the owners, a certain income level, and I'm telling you there's ranges here, but again, I'm not gonna go into the details, there is a, one the most incredible, ⁓ retirement plans that you probably never heard of before. Matter of fact, we just implemented it at our firm. It's called a cash balance plan. Remember the old days where you'd get a pension, you know, for those of you, and some of you still may, but very few do. That's kind of the fundamental of a pension plan is called a cash balance plan. And what it allows you as a business owner, if you, again, fit all of the criteria, what it allows you to do is to shelter huge sums of money. pre-tax a certain number of years. And that time period is up, whether you, ⁓ if hit a certain age, meaning usually of age of retirement, like 65, and a few other criteria, all this and I'm talking, dependent upon your and your age, it can literally be hundreds of thousands of dollars that you business owners sock away into a cash balance plan. in combination with your Safe Harbor 401K plan, which is a 401K, a profit sharing, and a company match. You gotta have all those kind of mixed together. And you are sheltering hundreds of thousands of dollars, again, if you hit the criteria, that is reducing your taxable income. So imagine if you taxable income of, I don't know, 500,000, a million, and could take hundreds of thousands of dollars off the top of that, put it away, Reduce your taxable income. Let's say you're able to shelter $500,000, which these plans, again, certain criteria you can. Now your taxable income went from a million dollars down to half a million. That's money that's growing for you in retirement. It went in pre-tax. It's growing tax deferred. And when you hit retirement, guess what? You can either create a pension off of it, or you can roll it over to an IRA and manage it any way that you want to. See, unfortunately, that great plan And that's just one of many strategies that we have. That great plan is only available to small business owners. For everybody else, that's a W-2 wage earner. not a lot of deductions left anymore. And that's the problem, that's the challenge that many people face. ⁓ if ⁓ a dual income. It's very easy to be making a couple hundred thousand dollars a year. But that's the sweet spot from the tax perspective of the tax rates, et cetera. And what can you write off these days? Maybe your mortgage, but people, ⁓ standard deduction doesn't allow you to itemize anymore, meaning to take the mortgage deduction and other So I hear it over and over again from people. It's like, my gosh, I make a great living. But I have nothing I can write off. And especially for those of you that are retirees, house is probably paid for. You got a decent income coming in. And there's no tax write-offs. So the reason I'm bringing all this up is to say, OK, here we are April 15 of 2026. It's still early in the year. You still have time to start planning for your 2026 taxes. Because come this time, April 15 of ⁓ 2027, I hope that what I cover with you today will open your eyes, whet your appetite a little bit, and you'll reach out to us or your CPA or whomever and really get involved in your tax planning. Because again, it now has become a year-round. responsibility. The old days it wasn't, right? When we were able to itemize everything, it's like, OK, I'm a W-2 employee. I can do this, this, and this, and that's about it. Well, now that list is even smaller. what has really changed with the ⁓ beautiful tax bill is, upon what industry, this is what's really unique now, depending upon what industry you are in, it can have a significant impact on the amount of taxes that you pay. And so this article that I'm going to share with you goes through the example of a lot of different kinds of people. Wall Street banker making a million dollars, a plumbing company owner, a retired CEO, a venture capitalist. And you're going to be amazed on same amount of income, how much taxes they pay, because they are in different industries. But then we'll get down to the high school teacher, the steakhouse server, the police officer, and the retired electrician. And you're going to be blown away also at the different amount of taxes and tax rates that these individuals pay. Because I'm sure many of you are aware, especially if you're in any industry that you're able to a tip, guess what? You can make a whole bunch of money, like $25,000 in tips, and basically pay no income tax on that 25,000. It's part of the big, beautiful tax bill. A lot of people are upset with that, but is what it is. So your responsibility is, again, to become Mr. Tax Planner. Have a great team, your financial advisor, your CPA, attorney if you're a high net worth individual, and plan for this. Because folks, it is a different world now after the passing of the big, beautiful tax bill. It's not, again, the amount of money, it's the industry you're in that really dictates what your tax rate and therefore your tax bill is gonna be. So I'm very, very excited, as you can tell by the passion of my voice, to share this story with you and to kind of educate you as we go through it. Because it's the new world that we find ourselves in. ⁓ I don't think there's any better day that we're all focused on our taxes than today, April the 15th. All right, so I'll get to that when we'll come back. We'll already hit our first break right now. My goodness, time is flying. Come back, I'll tell you what happened in the market today. Like I said, record-setting day for the NASDAQ and the S &P. Get that out of the way, and then we're gonna move into our topic. Again, I've titled it The Salary Penalty. Why W-2 earners pay more in taxes than just about anybody else. Let's turn it over to Kristen Snow. She's in the Right Now Traffic Center. Hello, Kristen. Welcome back to the Jon Sanchez Show on New Stock 780k, which happy tax day April the 15th. Well, record setting day for the S &P and the NASDAQ. I'll cover that now, but as a reminder, I'll be getting to my this afternoon. The penalty why W2 workers more in taxes than anybody else. All right, to market. Well, it was kind of sloppy throughout the day on the Dow Jones Industrial Average. Just never really could get much traction. And we finished just modestly lower down 72 points to a close of 48,463. But as I said, a record setting day for the NASDAQ and the S &P 500. The NASDAQ for the session rising 377 points, 1.6 % closing at a record of 24,016. The S &P rising 56 points, 0.80 % to close at 7,022, hit 7,026 intraday, but again, 7,022, a record close. And think about that again for a second, folks. Pretty remarkable considering everything that we've gone through, right? And now here we are. at record levels on two out of the three major averages. was no specific catalyst behind it. We had some import prices, export prices. I won't bore you with that. We had the Fed Beige Book. I won't bore you with that. ⁓ of that really mattered to the market. What market is focused on right now, of course, is Iran. And with the president coming out yesterday and reiterating it again today that the other side wants to make a deal. We're talking about having another second round of negotiations. That's all it took. That's what the You know, from yesterday's stellar gains to today. mean, if you missed what happened in the market yesterday, let's go back to that. We had a gain of 317 on the Dow yesterday, a gain of 455 on the NASDAQ, and a rise of just eight on the S &P 500. So let's just take the NASDAQ, right? 455 points yesterday, a 376 today. What are we at? 800 point gain in two days? Come on, that's not normal. But this market again, a lot of pent up demand as I've been saying. There was a lot of cash sitting on the sidelines. Investors are hungry for deals. And boy, are they finding some of those. Not so much now after these big run-ups these last couple days, but boy, oh boy, if you would have bought when this market was having troubles in certain areas, and I'm talking specifically in technology, my goodness, you would be up very nicely. What are some of those names? How about Microsoft? No one wanted to touch a stock a week ago. Yesterday, big run-up. Today, $18.11 gained 4.61%. Now at $411.22. Datadog up $10.49, 9.5 % to 121.06. Service now, another one nobody wanted to touch a couple weeks ago. Rising over 7 % today, $6.40 increase. Then we move into the semiconductor area, and not quite so fortunate. This is one of the areas that was weak today. Again, we're finding hot days, cold days on that. Remember Tesla was real strong, I mean, and the video was very strong yesterday. Well, today you had the likes of SanDisk down 52 bucks and some change about a 5.5 % loss. KLA 10 Core losing $47.80, 2.66%, et cetera. Meta was another standout. Again, stock was beaten up a few weeks ago, rising $10.60 today, 1.6 % to 673.10. Tesla had a wonderful day today. $27.75 gained 7.62 % to 391.95, again, another one. We had Bank of America report earnings numbers this morning. ⁓ Very, very strong performance with the company Caterpillar was one of the, ⁓ really pressure points, the reason the Dow did not do anything today. ⁓ Stock down $24.08, about a 3.03 % loss to 770.17. Recent Fed suggesting that rates are going to remain unchanged for some time in response, of course, as we warned that the Fed said, not a problem. Well, what it is, oil-driven inflation, right? ⁓ And so this sector where Caterpillar is, Carrier Global, so on and so forth, very susceptible to higher rates given the capital intensive nature of their businesses. So why CAT's been suffering a little bit. But let's go the year to date numbers. Looking pretty good here as I covered yesterday. Now the Russell year to date up 9.3%. The NASDAQ is higher by S &P's up 2.6 year to date. And the Dow, almost a 1 % gain, up 8 tenths of a percent. So like I said, very quiet on the news front. No real news coming out of ⁓ Iran, the ⁓ nothing like that. So an of what happens in this market, right? When two things happen. Number one, there's no bad news regarding Iran and oil. And number two, well, there's that, as I keep calling it, the golden carrot that Trump keeps waving out there we're going to have another round of negotiations. Things are going good. The war is over. Da-da-da-da-da-da. That's all these investors want to hear. and they buy everything up. so, we'll this momentum, but there is no complaints whatsoever. We're enjoying it while we can, ⁓ as all know, things can change with a simple true post or a comment or anything along those lines. So with that I'm gonna get started on my ⁓ topic today, April the 15th, right? Many of you are not having a good day today. You had to write some big fat checks to the IRS, and if you live a taxable state, to, of course, the state treasurer. You're going. How did this happen? did I go wrong? Well, as I said in the first segment, many people are not aware that now it's no longer income that you make that really determines your tax liability. It's the industry that you make ⁓ that in and what type of way that you've made it, whether you're a business owner, a W-2 employee, a retiree, or as you're gonna find out, a venture capitalist, which, by far is the best one to be, as you're going to learn here, certainly. again, I want to thank Bloomberg for this incredible story. I give them all the credit. Fascinating. let's kind just start off with really the major headline, which is not all millionaires created equal. At least that's according to the IRS. These days, the biggest factor determining what high earners owe the government is how they make money. And for the rich and the middle class alike, salaried professionals tend to pay far higher rates than other Americans with equivalent incomes. Give you a quick example before we go to break. Let's take a okay? Married, filing jointly, pulling down a million dollar salary. Now she can easily owe more than $300,000, so 30 % in federal income tax. And then of course, state income tax if ⁓ applicable. Now this calculation is according to a partner at the accounting firm, UHYLOP. But guess what? That's $60,000 more than business owners and $100,000 more than investors who earn the same amount. That's right, investors. Not bad when you're retiree, if you're an investor, you do it right, as I'll explain. So exploiting a break expanded in last year's tax law, right? The big, beautiful bill. Did you know that a millionaire venture capitalist can bring that hundred, that million dollar income can literally bring it down to a tax liability of You heard me right. Make a million dollars as a venture capitalist, your tax bill zero. to Jon O'Farrell, a venture capitalist and former general partner at Andreessen Horowitz, their big venture capital firm, he said the following quote. He said, there are dirty little secrets to this business, the venture capital business, that are highly lucrative for those who are familiar with them. Now remember, the president has now twice expanded the tax breaks for millions of Americans. His policies traditional Republican priorities like tax cuts for businesses and tax cuts for the wealthy. They also reflect a populist MAGA worldview, one that defines elite not by how much money people make, but again, how they make it. Because under Trump's tax regime, workers face comparatively higher tax burdens, and well-off professionals like doctors and lawyers are explicitly barred from one of the most lucrative of the recent tax breaks. Yeah, me into that one. Meanwhile, rewards flow to investors, business owners, and people making tips and overtime. By helping these small but symbolically important slices of the workforce, policy elevates Trump's base over college-educated Americans who have consistently voted for his opponents. You see, college graduates went for Democrats in the last three presidential elections by an average margin of 20 points, that's according to Pew Research Centers, where without bachelor degrees favored Trump by an average of nearly 10 points. Among the educated voters who have publicly embraced MAGA are some prominent Silicon Valley venture capitalists. And I'll stop right there as we continue our discussion, the salary penalty, why W2 workers pay more in taxes. Let's turn it over to Jack Saban. He's got news traffic and weather. Hello, Jack. Back to the Jon Sanchez Show on Newstalk 780K OH. Happy Wednesday to all of you. Happy Tax Day. We're focusing on the salary penalty why workers, W2 that is, workers, W2 workers, pay more in taxes than anybody else. All right, we're going to continue our story. But first, I want to give you some breaking news that came out right when I was wrapping up the last segment. I not had a chance to really delve deep into this, but I want to share it with you. Spirit Airlines said now they can liquidate as early as this week, according to people familiar with the matter. Of course, we know the carrier has been struggling for quite some time. And Spirit said in a statement, we don't comment on market rumors and speculation. Let's see, the exact day the carrier could begin liquidation was immediately clear. Bloomberg early reported on the potential liquidation. So no confirmation from the company yet, but that could be interesting. We'll keep an eye on that. All right, once again, it was a record-setting day for the market, at least on the NASDAQ and the S &P side of things. NASDAQ rose 378 points, 377, excuse me, 1.6 % increase. S &P gained 56 points to a close of 7,022 record, and the Dow today was down 72 points. All right, it's April the 15th. We're all, you know, our hands hurting from writing checks to the IRS, to the state, et cetera. But you know what? One thing that's changed? It's not how much money you make, it's how you make it, right? I'm gonna continue going through this incredible Bloomberg article, again with you ⁓ how people make different, pay different in taxes on the same income, on the same income, okay? ⁓ So let start with an example with you, okay? So we'll start some high income earners and we're gonna break it down between a banker, a plumbing company owner, a retired CEO, and a venture capitalist. Okay, you ready for this? Okay, so again, setting the table, they all make a million dollars, okay? ⁓ The Wall Street banker, again, files joint tax return with her spouse. So she makes $1 million in W-2 wages. Her ordinary federal income tax would be $283,000, but what, 28.3 %? Her payroll taxes add on another $32,000. So total federal tax she would be paying would be $315,000, or 31 and 1 percent. That's your high income earning investment banker. Now let's go to the plumbing company owner. He makes the million dollars, but his federal income tax is 199,000. His self-employment tax is 55,000. So you total that up, his tax bill is $254,000 or 25.4%. So 254 versus the W-2 banker at 315. Because why? He gets deductions, right? How about the retired CEO? remember before I get to the retired CEO and how he or she makes their money, remember what the wealthy do. They borrow, borrow, borrow, die and have zero tax, right? When you see the big stories that I share with you every day on this program of a CEO, you know, I don't Larry Ellison of Oracle comes into mind the big paramount deal that he helped his son do. They needed billions of dollars. These CEOs and executives, they don't sell their stock. Their wealth is tied into the company stock, the company that they founded or that they run. where their wealth is, is in that stock. But you think for a minute they're going to sell the stock and pay upwards of sometimes ⁓ higher, obviously? 23 can the max, 23 and 1.5. And capital gains tax? ⁓ Heck no. do they do? They go to their favorite Wall Street bank and they go, hey, look, I'm going to pledge a million shares of my company. me a loan against it. And so they get a loan against it. Doesn't trigger any taxable capital gains. And then, of course, they discontinue, make the payments, et cetera, on it. ⁓ And at some point, they die. And then whoever inherits that stock gets a stepped up cost basis. So let's say their kid inherits it. All that capital gain is gone. Same thing happens on real estate. So let's go to our retired CEO, right? He makes a million dollars, but he makes it in long-term capital gains, qualified dividends, and carried interest. So his tax bill would be about $174,300 in capital gains tax. Net investment income, about $285,000. So his total federal tax bill is $202,800. So let's compare that back to the banker, the W-2 banker, whose tax bill is $315,000. The retired CEO's effective tax rate, 20.3 % versus the banker at 31.5 and the plumber at 25.4%. But if you think that's good, many of you may not be aware of this one. I always said I should have become a venture capitalist. This is the reason you want to be a venture capitalist. Because you see, a venture capitalist, I have to laugh, I'm sorry, I have to laugh at this tax rule. with what's called the Qualified Small Business Stock, or QSBS as we call it. The QSBS break allows investors and employees with early startup stakes pay no taxes on gains up to million or 10 times initial stake, whichever is greater. Let me repeat that. They pay zero tax on income or gains up to $10 million or 10 times their initial stake. Last year, that cap, 2025, was increased to 15 million for stock acquired going forward. So when you see these venture capitalists on CNBC or Bloomberg TV or wherever you may see them, don't let them fool you for a minute. They can make up to $15 million. pay zero, zero, zero federal income tax. The wealthier keep it wealthier. All right, now let's go down to the hardworking man and woman, kind of middle class, okay? We're gonna take a look somebody that's got a $80,000 income. We're gonna look at a teacher, a steakhouse server, a police officer, and a retired electrician, okay? So the high school teacher, right? Tough job, 40 years old. All these people make $80,000 a year. Listen to the difference in the tax amounts. So again, this high school teacher, he pays $9,500. Again, this is considering that he's single with no dependents. All these people are single with no dependents. So this high school teacher making $80,000, 40 years old, he pays $9,500 in federal income tax. He pays another $6,100 in employee payroll taxes. For his total federal tax bill, $15,600. 19.5 % effective tax rate. Okay, now let's go to one of the biggest beneficiaries of the big, beautiful tax bill, those that can make money via tips. So let's take a steakhouse server, and she makes $80,000 a year, including, what many of you may not be aware of, $25,000. That's right, a person that works in a business that they collect tips. from last year through the year 2028 if they are single. and they make up to $150,000, they can make $25,000 in tips and pay zero income tax. If they're married and file jointly, they can make $300,000 and make up to $25,000 in tips and pay zero income tax. So listen to this one on our Steakhouse server who's single. She makes $80,000 of which $25,000 is. tax deductible tips. Her federal income tax is only $4,600. Payroll tax is $6,100. Total federal tax, $10,700. Effective tax rate, $13.4. So look it, she's essentially paying almost $5,000 less in federal income tax. Same income, then that poor teacher that definitely works hard. All right, let's go to a police officer. Okay, $80,000 including about 12.5 in deductible overtime. Same thing, age 40. Got hard work in man or woman, pays $6,700 in federal income tax. Payroll tax is $6,100. Total federal tax, $12,800 or 16 % effective tax rate. But what about that retired electrician or business owner, whatever you want to call it? He makes $80,000 in pensions and social security and he's 70 years old. Well, federal income tax. $5,000. Payroll obviously, zero. So it's total federal income tax, $5,000 effective tax rate, 6%. So you see how the numbers work out, Same same tax filing status. but completely different tax rates. And that's what this whole thing is about today. It's all about where you make your money and how you make your money. therefore, that is where a great determination comes in on how much income tax you are going to pay. And again, obviously, I don't have a lot of time, so I really go some significant details and other with you. But I think you get point. It no longer is, you know, I make this amount of money, my deductions are this, and therefore I know what my tax liability is gonna be. Think about the way you make your money. Let's go to many of you that are 70 years old or older. You know, under the big, beautiful tax bill, you're now eligible for a new enhanced $6,000 perk. That's right, $6,000 perk, which means a 70-year-old with $80,000 from pensions and Social Security can owe less than a third. as much income tax as a 64 year old, still saving for retirement, going to work every day, making the same amount of money. Let's take our final break. We'll come back and wrap it up. Let's turn over to Kristen Snow. Right now, traffic center, Kristen. Back to the Jon Sanchez Show on News Talk 780-KOH. All right, let's kind of wrap this up here because we're running out of time very quickly, unfortunately. hopefully the biggest takeaway that you have of segment I've or a couple segments I've done on the income tax side of things, your biggest takeaway is First of all, if you're feeling down today you had to write a big check to the government, again, still very early in 2025, lots of tax strategies that you could potentially implement. Obviously, you've understood that a business owner, a venture capitalist, which many of us are never going to be, so on and so forth, have huge advantages, not only deductions, but also on, as I said at the beginning of the show, incredible if you're a business owner, to shelter money from being taxed and saved for retirement and grow tax-deferred and so on and so forth. get asked this a lot. It's like, why do the wealthy? You've heard Warren Buffett say he isn't a lower tax rate than his secretary. And you see the likes of Jeff Bezos never paying a small amount of income taxes on a percentage of his income compared to everybody else. I mean, you hear all the stories, right? why is that? Well, it's pretty simple. The don't earn income. They do not like ⁓ W-2 They love, again, capital gains as much they can love any tax. Capital gains because it's generally significantly lower than what their ordinary income rate's gonna be. they love to ⁓ and then die and then no one ends up paying the income taxes on it. There's a lot of different ways they can do it. But they structure their income and you can too. If you're a W-2 employee, max out your 401k. If you're eligible, max out every retirement account you can. Again, many other ways and I'll do some more shows on this. Even if you're a WTO employee and you think, geez, I'm stuck at 23.5 contribution limit to the ⁓ I can show you ways that you can actually increase that pretty significantly more than double that. But you have to understand how it's done. For those that are business owners, well, I've told even up until, well, matter of fact, if you decide to go on extension today, I can show you a retirement plan that you can put your money into up until the time you file your federal tax return for 2025. So if you ⁓ got a big tax by all means, have your accountant file an extension, give us a call. And we can, of course, help you on that side of it. But once again, you want to shift from W2 type of income to business income to investment income to tax advantage income. In other words, you want to be in control of the tax side of things. Remember, real estate investing, for those of you that qualify, business ownership, retirement planning structures, estate planning structures, all of this comes together. So again, if you find yourself in that 100,000 to 200,000 range or more, You are the ones the government loves because you pay a high tax rate. It is time for you to roll over a new page and begin to get involved in tax structuring. If we can help you, us a call, 775-800-1801, or send me an email at johnsanchesgantt.com. And I'd love to sit down with you and show you some strategies. Hopefully you have enjoyed it. God bless. Have a great afternoon. We'll see you tomorrow on the Jon Sanchez Show.