$400K on a W-2 or $250K in Business Profit: Which Keeps More Money?
A popular take online says business owners come out ahead thanks to deductions. Grant looked at the numbers and disagrees, with one big caveat.
“Would you rather make $400,000 on a W-2 or $250,000 in business profit?”
The short version
- From a purely numbers perspective, you'll probably walk home with more money at the $400K W-2.
- Business owners can deduct things like a home office and cell phone, but they also have self-employment taxes.
- Quality of life and flexibility may favor the business owner, depending on the business.
The short answer
From a pure numbers standpoint, you'll probably take home more with a $400K W-2 than with $250K of business profit, even after accounting for all the different taxes.
The argument for the business owner
The deduction argument is real. Business owners can deduct things like a home office, a cell phone and other expenses tied to the business.
Why the numbers still favor the W-2
But business owners also pay self-employment tax, which can be hard to manage. You may need to switch to an S corporation to deal with it.
Where the business owner can win
Numbers aren't everything. A $400K W-2 job could demand a lot of hours. As a business owner earning $250K, you may have more flexibility and a better quality of life, depending on your industry.
Purely on the numbers, though, I'd expect the $400K W-2 to come out ahead.
Frequently asked questions
Do business deductions make up for a higher W-2 salary?
Business owners can deduct things like a home office and cell phones, but they also have self-employment taxes. From a purely numbers perspective, you'll probably walk away with more at the higher W-2 in this example.
Is being a business owner still worth it?
You may have more flexibility and a better quality of life as a business owner. It depends on the type of business that you're in.