Practical Guide to saving W2 taxes

The Problem: High Earners, Higher Taxes

Jay & Maya, a successful tech couple, have built strong careers at Apple, earning:

💰 $750,000 in salary

💰 $300,000 in bonuses

Their $1.5M in RSUs, $2.5M home in Sunnyvale, and rental property in Livermore are all great assets, but every year, they face a massive tax burden.

Their 2024 Tax Breakdown:

• Federal income tax: $338,741

• California state tax: $110,335

• Social Security tax: $10,453

• Medicare tax: $22,875

• Total tax burden: $482,404

After taxes, their take-home pay shrinks to $567,595.

But now, they want to do something different.

They’re tired of handing nearly half their earnings to the IRS and want to start a business.

The Plan: Investing in Their Own Business

After years in tech, Maya decides to start a consulting business advising startups, and Jay launches an online personal finance course.

They know businesses take time to become profitable, so they plan to invest $50,000 from their W2 income into:

🔹 Branding, website, and marketing – $20,000

🔹 Software, hosting, and business tools – $7,000

🔹 Legal & incorporation fees – $6,000

🔹 Virtual assistant & content creation – $10,000

🔹 Networking, conferences, and industry events – $7,000

Total first-year business expenses: $50,000

Because the business won’t make a profit in Year 1, this loss becomes a major tax advantage.

How a Business Loss Reduces Their W2 Taxes

Normally, W2 employees cannot deduct most expenses from their taxable income.

But as business owners, they can write off these expenses against their total income.

Since their new business made little to no revenue in Year 1, they can claim a $50,000 business loss.

🔹 Tax rule: Business losses can offset W2 income.

Before starting the business:

Their taxable income was $1,050,000.

After deducting business expenses:

Their taxable income drops to $1,000,000.

That’s a $50,000 reduction in taxable income.

How Much Do They Save in Taxes?

Let’s break it down:

✅ Federal tax savings

• That $50,000 was taxed at the highest marginal rate (37%).

• By reducing their taxable income, they save $18,500 in federal taxes.

  
  

✅ California state tax savings

• California’s top tax rate is 13.3%.

• This business loss saves them $6,650 in state taxes.

✅ Payroll tax savings (Medicare & Social Security)

• They avoid payroll taxes on this income, saving another $1,200.

💰 Total tax savings: $26,350 in Year 1!

So while they invested $50,000 into their business, they get back over 50% of it immediately in tax savings.

And this doesn’t even count future benefits, such as:

• Depreciation on new equipment (more tax savings next year)

• Solo 401(k) contributions (letting them defer even more taxes)

• Future business deductions once they start making revenue

  
  

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What Happens in Year 2 and Beyond?

Like most new businesses, Year 2 won’t be wildly profitable yet.

✅ Maya’s consulting revenue: $50,000

✅ Jay’s online course income: $20,000

✅ Total business income: $70,000

Meanwhile, their business expenses continue:

• Marketing & branding: $15,000

• Software & hosting: $7,000

• Networking & conferences: $6,000

• Virtual assistant: $8,000

  
  

Total expenses in Year 2: $36,000

Tax Benefits Continue

🔹 Business profit after expenses = $34,000

🔹 Still far lower than W2 tax rates!

And they can now optimize how they take this income by:

✔ Using Solo 401(k) contributions to defer some of their earnings

✔ Taking part of the income as S-Corp distributions to avoid payroll taxes

✔ Continuing to write off ongoing business expenses

The real payoff comes in Year 3 and beyond when their business starts making six figures, but they’ll always be paying less tax than if they earned the same amount as W2 income.

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Final Takeaway: Why Every High Earner Should Consider This Strategy

✔ Starting a business lets you turn W2 salary into tax-deductible business expenses

✔ Business losses can offset W2 income, cutting your tax bill significantly

✔ Even if the business isn’t profitable yet, the tax savings are immediate

✔ Once profitable, the business can generate income in a more tax-efficient way

🚀 Jay & Maya used their W2 income to build a tax-advantaged business—what’s stopping you?

Don’t Overpay Another Year—Take Action Today

📆 Schedule a free consultation with Taxmosis today and start turning tax liabilities into wealth-building opportunities.