Business

I never thought of myself as a businessman- until 2015 when the IRS told me I was, and that I therefore needed to pay them more money to cover the self-employment tax. Naturally I was confused and angry about this at first, but in the long run it turns out they were doing me a favor.

If you make a tiny amount of 1099-MISC or 1099-NEC income on occasion, the IRS is probably* fine with characterizing this as ordinary income from a hobby. But if you earn 1099 income at all regularly, they will likely want to characterize you as a business, and want you to pay a self-employment tax similar to the payroll tax that W2 employees pay (though it will look higher to you, since you will pay both the employee and employer halves of the tax). If you make an intermediate amount of 1099 income, you might have the choice of whether to call this hobby income or business income; I had thought it would be better to avoid the complications and extra taxes of being a business, but it turns out that being a business unlocks new opportunities for deductions than can far outweigh the self-employment tax.

For example, a home office, business-related travel expenses, and advertising expenses can be deductible. For a writer, this could cover conferences, website expenses, computers, and much more. It also means you can start a SEP IRA– in addition to a personal IRA if you like. This alone could allow you to deduct thousands of dollars in income per year (technically up to $69k if you make at least $276,000 per year in business income, though if you make that much, you’re the one who should be giving me advice). The SEP IRA has the advantage over a personal IRA of a much higher income limit and, potentially a higher contribution limit, though again the beauty is that you don’t have to choose- you can just do both.

While this post is mainly about business, I also think regular IRAs might still be underrated. I didn’t start one until 2022, but I should have done it much earlier. First I thought I was too poor (low income, then higher income but with student loans to pay off first), then I thought I was too rich (above the income limits). It turns out though that you can still start a personal IRA even when you are above the income limits- it just means you only get one tax benefit instead of two, but that one tax benefit is still pretty good.

Every IRA has the benefit of investments growing tax-free; if you meet the income limits then IRAs get the additional benefit of avoiding income taxes either when you put the money in (for traditional) or when you pull it out (for Roth). But even if you “only” get the benefit of tax free growth, that can still be a huge monetary benefit depending on your investment strategy. It is also a big time benefit- every taxable brokerage account means at least one** extra tax form to deal with every year, while an IRA account avoids this.

Another great benefit to IRAs (SEP or regular) is that you can still start one now and make contributions for the 2024 tax year. I was just doing my taxes and kicking myself for not doing some things differently back in 2024 when it would have helped; but IRAs are like a form of time travel where you can still go back and fix things, at least until April 15th.

*Disclaimer- Not official tax advice, I’m not an accountant, I’m just a 37 year old guy with lifetime 1-1-1 record against the IRS. Three times they have told me I owed them more than I paid on a tax return. Once I won (I told them I owed nothing and explained why, and they agreed). Once I lost (I told them oh shit, you’re right and paid them). For the story I started this post with, I call it a draw (they told me I owed them X, I told them I owed nothing and explained why, then they told me I actually owed them 1/3X and I just paid it).

**More than one if like me you accidentally invest in a partnership and as a result get a K-1 on top of the usual 1099-DIV for that overall brokerage account

HT: Trinette McGoon

The late Dallas Willard, a professor at USC, wrote on a variety of subjects touching on moral philosophy. In 2006 he addressed the topic, “The Business of Business”. He noted that the spontaneous, obvious answer today to the question, “What is business (manufacturing, commerce) for?” would be: “The business of business is to make money for those who are engaged in it.”

But there is a tension here. Willard notes that that is NOT how businessmen/professionals present their raison d’etre :

“No business or other profession that advertises its ‘services’ announces to the public that it is there for the purpose of enriching itself or those involved in it. With one accord they all say their purpose is service, not serve-us. I have never met “professionals” who would tell their clients that they were there just for their own self-interest.”

This ambiguity in the role of businessmen/women (or “merchants”, as they used to be called) is not new. Willard reaches back to the writings of John Ruskin who remarked in 1860, “The fact is that people never have had clearly explained to them the true functions of a merchant with respect to other people.” Ruskin went on to place what we today call “business” among the “Five great intellectual professions” necessary to the life of “every civilized nation.” With respect to the nation:

“The Soldier’s profession is to defend it.

The Pastor’s to teach it.

The Physician’s, to keep it in health.

The Lawyer’s to enforce justice in it

The Merchant’s to provide for it.”

Ruskin added: “And the duty of all these men is, on due occasion, to die for it.” The soldier to die “rather than leave his post in battle,” the physician “rather than leave his post in plague,” the pastor “rather than teach falsehood,” the lawyer “rather than countenance injustice.” (Indeed!)

But what of the merchant? What is it that the merchant (businessman) would die for rather than do?

Well, the main function of the merchant or manufacturer in Ruskin’s view is to provide for the community, not simply make money for him/herself:

It is no more his function to get profit for himself out of that provision than it is a clergyman’s function to get his stipend. The stipend is a due and necessary adjunct, but not the object of his life, if he be a true clergyman, any more than his fee (or honorarium) is the object of life to a true physician. Neither is his fee the object of life to a true merchant. All three, if true men, have a work to be done irrespective of fee…. That is to say, he has to understand to their very root the qualities of the thing he deals in, and the means of obtaining or producing it; and he has to apply all his sagacity and energy to the producing or obtaining it in perfect state, and distributing it at the cheapest possible price where it is most needed.

Ruskin also noted that since the merchant has direct control over those who work for him, “…it becomes his duty, not only to be always considering how to produce what he sells in the purest and cheapest forms, but how to make the various employments involved in the production or transference of it most beneficial to the men employed.”

Furthermore, if the enterprise falls on hard times, it is the duty of the CEO (or other top management) to share fully in the hardships suffered by the other employees: “As the captain of a ship is duty-bound to be the last to leave the ship in disaster,…so the manufacturer, in any commercial crisis or distress, is bound to take the suffering of it with his men, and even to take more of it for himself than he allows his men to feel; as a father would in a famine, shipwreck, or battle, sacrifice himself for his son.”

In a similar vein, activist lawyer and later Supreme Court Justice Louis Brandeis in 1912 said at a Brown University commencement address:

The recognized professions…definitely reject the size of financial return as the measure of success. They select as their test, excellence of performance in the broadest sense—and include, among other things, advance in particular occupation and service to the community. These are the basis of all worthy reputations in the recognized professions. In them a large income is the ordinary incident of success; but he who exaggerates the value of the incident is apt to fail of real success…In the field of modern business, so rich in opportunity for the exercise of man’s finest and most varied mental faculties and moral qualities, mere money-making cannot be regarded as the legitimate end.

Willard drily remarked, “Texts by Ruskin and by Brandeis, along with similar ones, are not popular references in our schools of business today.” My own personal observations are that the nobility of the management and entrepreneurs seems to scale somewhat inversely with the size and age of the enterprise. It gets tricky to start assessing degrees of moral rectitude here, because in classical exchange theory, any voluntary transaction (buying/selling goods, agreement to work for certain wages) brings benefits to both parties, and to society as a whole, quite apart from any conscious intent of altruism.

At large end of the scale, we see CEOs who drive big companies into the ground and then waltz away with multimillion dollar golden parachutes; no sharing of the employees’ hardships at all.

And for many Wall Street dealmakers, it truly is all about the money: float a couple billions in junk bonds, take control of some company, force the company to pay you fees, load the company with your crappy debt, and walk away with a cool billion or so. Or take a short position in a publicly traded company, publish a bogus report (“short attack”) alleging horrible malfeasance at the company, driving share prices down, close out your short position at a huge profit, and move on to the next victim. These seem to be purely predatory actions, taking advantage of the system to make a buck with no clear redeeming social value.

At the other end of the scale, the (often youngish) folks starting a new software firm, the idealistic couple chucking fast city life to try to make a go of a coffee house or BnB in a small town, the plumber with an associate, all of these I think are very serious about providing the public with a good product/service, and may tend to take care of their employees and also to put a lot of their own personal skin (savings, a lot of extra time) in the game to get these enterprises going. The younger Henry Ford famously fought to pay his employees high wages, over the objections of company shareholders, who wanted more profits to accrue to them. I know personally two men in the greater Trenton, NJ area who (as an expression of their religious values) intentionally conduct computer-related businesses such that they can provide employment to disadvantaged local young men.

Maybe when an enterprise gets large enough that, to management, its employees and its customers become numbers rather than individual people is the point where the transition to pure greed as the fundamental motive occurs, even if it proves prudent in support of profits to maintain policies and communications which promote the welfare of customers and employees.