Wednesday, February 14, 2018

The Hourly Intern & The Southwestern Advantage Sales Intern

Guaranteed hourly pay is a great fit for many people. It frustrates others to feel that they outwork their co-workers only to be paid the same rate; they would rather be paid according to their effort. In this article, we'll compare how savings can work between an hourly college intern (W-2) versus what a first year Southwestern Advantage sales intern (1099-MISC) can save before ever advancing into a leadership role. Sometimes this money & tax stuff gets dense. We'll try to keep this readable.

$20 per Hour
Let's say you intern at a local firm. This firm pays you a very generous $20 per hour and you work 35 hours each week. Your gross pay will be $700 ($20 X 35) per week. You're happy, your friends envy you, your parents are proud, life's great! But then, Uncle Sam immediately shows up to take his share: Social Security tax, Medicare tax, and Income tax. (State income tax varies; a few lucky states don't have this tax.)

Net Pay
Your net pay is what's actually on your paycheck once taxes are taken out. If you make $700 one week, your taxes may look something like this, depending on the state:

Federal income tax
11 % of gross pay
$700 x .11
= $77.00
State income tax*
4 % of gross pay
$700 x .04
= $28.00
Social Security tax
6.2 % of gross pay
$700 x .062
= $43.40
Medicare tax
1.45 % of gross pay
$700 x .0145
= $10.15
Total taxes

$700 – $158.55 = $541.45 on the paycheck

x12 week summer: $6,497.40

Oh right, it costs money to live life. Let’s be very conservative and assume you only spend a combined $100 per week on food, rent, transportation, and other expenses. After 12 weeks, you would have spent a minimum of $1200.

Your in-hand savings:  $5,297.40
Now, let’s look at a first year Southwestern Advantage sales intern (1099-MISC)
For context, in 2017, the #100 ranked First Year SWA Salesperson made a gross pre-tax profit of $8,474 which historically in our program is pretty standard for that ranking. Not high, not low, very normal.
How might this sort out with 1099-MISC tax status? First, you are not taxed immediately on your gross-profit. You are able to deduct your business expenses. Let’s take that $8,474 as our gross profit for this example and subtract the $2,000 you spent on business expenses like credit card processing fees, product freight, etc., and let's toss out an extra $500 just for good measure (make it rain!). The amount you're taxed on is now at $5,974.

Next, you get to deduct what’s called a per-diem rate. Uncle Sam offers a variety of daily deductions for small business owners to help them better-afford food, travel, etc. Let’s use a common per-diem rate of $20/day. After 12 weeks, that’s $1,680. Now, this doesn’t decrease our in-hand money (you already deducted your expenses), this decreases the amount that’s taxed, which brings us down further to $4,294.
Every mile driven earns you 53.5¢ per mile in deductions (54.5¢ for 2018). Let’s say you drove 700 miles each week of the summer, for 8,400 total miles. You pick: deduct about $750 in total gas expenses or deduct $4,494 in mileage (pick mileage).

Good news, there are even more deductions you can take! But instead, let’s stop there. Why? Because your deductions have brought you down to $0 that Uncle Sam will now tax you on.

What if you don't make it down to $0? Starting in 2018, you can take advantage of the Qualified Business Income Deduction. QBID says that if you end up above 0 after you've exhausted all of your deductions, you can chop 20% more off that number before taxes kick in. Compare that to the $20/35 job with $158.55 taken out weekly for taxes.

Remember that $750 you spent on gas, though? That dropped your in-hand money from $5,974 to $5,224. So, in this hypothetical situation, you finished the summer having made $8,474 total, but after expenses, ending up with $5,224 in-hand. The $20/35 job had $5,297.40 in-hand.

These numbers are kinda close. So...
  • How likely is it to find a $20 per hour 35 hours per week summer job? Possible, sure; but probable? Is it more realistic to earn $15/hr and work fewer than 30 hours per week? 
$15 x 30 x 12 weeks = $5400 – taxes = $4,177
  • Say you land a $15/30 job, how likely is it that you’ll only spend $100 per week? Is it more realistic that you’ll spend ~$200/wk for 12 weeks?  
$4,177 – $2,400 = $1,777 saved
Consider what actually ends up in your pocket – the amount you save.
Hypothetical hourly intern: $1,777
Hypothetical SWA sales intern: $5,224

Lastly, cut $1,000 cash from the SWA sales intern's savings, and give a $1,000 cash bonus to the hourly intern. The SWA salesperson has still saved 80% more. This student is in a far better position to afford school, life, and start a Roth IRA before they even advance into the leadership opportunities within our program.
Southwestern Advantage interns understand that, in sales, working 3x as hard can save them 3x or more by the end of their summer.
Do you like the idea of your pay and savings being determined by your effort?
Do you think you could finish in the top 100?  

The above content was made possible by Southwestern Tax Services – a full-service tax firm within the Southwestern Family of Companies.

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