Edit: and there are no "open source" tools. You have to buy them, and good ones are not cheap.
I don't doubt that someone who is running a business is earning more, this article in the WSJ says:
"At the time that they sold the company, it had 18 employees and was bringing in about $3 million in revenue a year. "
This was a plumbing business with two founders, founded in 2012. The article goes on to say that PE buys smaller businesses like the one above for:
"smaller outfits (such as Rice’s), which Redwood says it buys outright for an average of $1 million..."
The Occupational Outlook handbook says:
"The median annual wage for electricians was $61,590 in May 2023. The median wage is the wage at which half the workers in an occupation earned more than that amount and half earned less. The lowest 10 percent earned less than $38,470, and the highest 10 percent earned more than $104,180." The mean annual wage for all occupations in that resource is $65,470.
Talking to them the common threads are:
- Cash based jobs. e.g. I charge my materials to the business (tax expense) and give the customer a small discount (say 10%) if they pay in cash. Assuming a 30% tax rate it means I can make for tax purposes my income less and my expenses more. In the end however I'm significantly ahead - any savings I've given to the customer are more than offset by tax savings.
- Income splitting: Wife "does the books" after hours, I split the income two ways. This way I don't pay as much tax in a regressive tax system as I can push myself to a lower tax band. If you want a single income family, better to own a trade business than be a professional. NOTE: Some countries/places support this more than others, if a country has good income splitting laws this diminishes this advantage.
- Favors: A lot of money is earned by mutual favors rather than monetary transfers especially in renovations/etc. e.g. I will do the plumbing for your house, and mine, you can do the concrete slab for both houses and we will call it square. Trades people typically know other trades people and a lot of the property can be built that way. No money exchanged, no tax paid. But the capital gains from renovations can be substantial - and tax of them can be deferred till sale. I've seen people earn millions this way, completely dwarfing their business income. Capital gains in most countries is also taxed at a lower rate and there's a lot of exemptions (i.e. if you live in it, etc). The benefits of this over many renovations can add to millions in extra wealth, none of it reported as income and under taxed.
- Asset Depreciation/Write Off: Want that big pick up truck? But want to pay the same after tax price as a small hatch? Claim it on your business, write it off, and expense it. May not apply as strongly in the US, but I've seen workers with very expensive cars here for the same after tax price as I could buy a simple sedan for. This applies to other things like tools for the house, etc.
All of the above reduces the official statistics substantially as under reporting, and makes blue collar a lot more appealing than it may seem on the surface. I would argue a self employed blue collar worker on say $120k would be as good as a white collar worker on $200k where I live, maybe even more. If you have a family and are a single income earner in some countries it makes sense to jump straight into blue collar.
> A lot of money is earned by mutual favors rather than monetary transfers especially in renovations/etc. e.g. I will do the plumbing for your house, and mine, you can do the concrete slab for both houses and we will call it square. Trades people typically know other trades people and a lot of the property can be built that way. No money exchanged, no tax paid.
Indeed, cheating on your taxes can leave you with extra after- (instead-of-?) tax cash in your pocket.
I do pay my wife part of my income so it hits a lower tax rate (this is fine), and she does do my books (she's a CPA, so that tracks).
But there's a staggering amount of expenses I'd normally be paying out of pocket with my post-tax dollars that are now being paid by "the company". Anything the company pays for I end up paying $0 in tax on that money. Like probably 20% of the stuff _I would be paying for anyway_ is paid for by the company and I pay 0% tax instead of 50% tax. Like, what might have been $30k/yr in expenses before now costs me $15k/yr and lets me put $7.5k in my pocket out of what's left.
Health expenses? Yeah, why not establish a self-funded company health plan and pay those out of untaxed dollars too!
It's especially stark in things like "home office" expenses... if I claim it on my personal taxes (whether from my company or working for someone else), I can't claim any mortgage interest as an expense. If I claim it as my company's place of business though I can claim that and much more.
It costs me like $60/yr to keep renewing the corporation, and if I wasn't married to a CPA probably another $600-800 for tax filing. It easily puts 10x that back in my pocket.
And I mean, yeah, it's definitely way easier to cheat on your taxes if you're so inclined. And from what I've seen of the filings my wife has done over the years for accounting firms, bending the rules is pretty much the norm. Many an argument has been had over "no, that's not the letter of the rules I'm not letting you file that" and "okay but you're throwing money away because literally everyone else does that because there's no way to catch it".
IOW, as long as you color within the lines, they really don't care. My tax guy is pretty good at telling me what might trigger an audit vs what IRS thinks of as perfectly normal.