Make Money as an Employee

The default way to make money in America is to get a job. I don’t know if you realize it, but pretty much everyone assumes that you are or will be an employee. This assumption is such a part of the fabric of American consciousness that most people never even question it. When you graduate from college everyone asks you, “Have you gotten a job yet?” When you meet someone new the first question is “So, where do you work?” These questions seem normal.

While making money as an employee is a good option for many people, most of us (including myself) never made a conscious decision to make money from employment. We just fell into it by default. And that’s the problem. If you’ve never evaluated the benefits and risks of being an employee and compared them to the risks and benefits of other ways to make money, then you may have set yourself up for some avoidable displeasure.

In this post, we’ll begin to step back and take a fair look at employment. First we’ll discuss the basics of the system and then we’ll look at some pros and cons of employment. We’re also going to introduce some criteria that we’ll use to evaluate any income system, whether it’s being an employee, making money online, or investing your money. The criteria we use to evaluate income systems are as follows: The Asset – what exactly it is that is making money in this system; The Cash Inflows – specifically how income is received from this system; The Taxes – how the system and the income it generates are taxed; The Cash Outflows – the expenses and debts created by the system; and lastly, System Control – who exactly controls and runs the system.

Looking at these criteria allow us to systematically examine any method of making money and determine what the pros and cons of that system are. Let’s now take a look at employment as a system for making money.

The Asset:

All systems of making money fall into one of two categories:

1)trading the use of an asset for money, or
2)creating or adding value to an asset that you then sell.

Employment falls into the former category since you are the asset that is being traded for money.

Think about that for a minute. Does that seem a bit Orwellian to you? “You are the asset that is being traded for money.” If you strip away all of the emotional and human aspects of your job and just look at it from a financial standpoint, that’s exactly what is happening. Or, if we want to be more specific, your time is the asset being traded for money. You go to work, give eight hours of your life to your boss, and he or she pays you a salary. If you stop giving him your time, he stops giving you his money.

The Cash Inflows:

Typically an employee agrees to perform specified tasks or meet certain goals in exchange for cash pay and non-cash benefits. Wages are generally received on a weekly, biweekly or semi-monthly schedule. Benefits may include paid vacation, paid sick-days, subsidized health and life insurance, and training.

The Taxes:

Wages from employment are generally subject to federal, state, and local income taxes as well as payroll taxes (FICA and Medicare). These taxes are withheld from each paycheck so there is minimal opportunity for tax planning or tax deferral. This is important to note since taxes on wages are generally higher than on other forms of income.

For example, if I were making $400,000 a year (I’m not yet) then I would pay tax at the following rates:

Federal: 35% of taxable income
State: 5% of taxable income
County: 1% of gross wages
City: 0.5% of gross wages
Payroll: 7.65 of gross wages

That’s a total of 49.15%. So for every additional dollar earned I only get to keep 51 cents. However, if that additional dollar of income came from a rental property then I could keep 60 cents. And if the additional dollar came from a capital investment in a business then I could keep 80 cents.

Cash Outflows

Working as an employee also causes you to incur expenses. You will probably have automobile expenses due to a commute, and could possibly even need to purchase an additional vehicle. On top of that, additional costs for clothing, medical treatments, food, and insurance should be expected.

System Control

When you work as an employee, the system that is generating your money (the business that you work for) is going to be owned and controlled by one of several people – it might be your boss, it might be a group of partners (such as a law firm) or, in a large company, it might be the shareholders. The important thing to note here is that in all of these situations, the system is not controlled by you. You will generally have little to no say in the operation of the business, the clients it takes, or how much money it makes.

This is part one of our look at employment as a system to make money. Hopefully this has helped you think about having a typical job in a new light. In our next post, we’ll examine employment further and see when it’s a good idea to have a job and when it’s not such a good idea.