23—Lever #2: Taxes (Part One—Payroll Taxes and Withholding)
Two things in this life are certain; this is one of them
At this point, you might be impatiently wondering, “Taxes, seriously? When will we get to the good stuff, like investing and planning for retirement?” I hear you, but we have more work to do in the short term before we go long.
We've discussed your starting wealth and income, which positively impact your "Financial Life Equation" (FLE). Now, we will discuss taxes, which, as you can see from our FLE below, are a negative (unless the IRS gives you money, which they sometimes do in the form of tax credits). They reduce current wealth (Wt) and income (∑It+n ); therefore, you must minimize them as much as possible to impact your FLE positively, or it will go the other way.
Or if you prefer: Future wealth = Starting wealth + Sum of all income – Sum of all taxes (∑Tt+n ) – Sum of all giving – Sum of all living expenses + Sum of interest earned – Sum of interest paid.
Did you know that the average American will pay $524,625 in taxes throughout their lifetime? That’s more than a third (34.7%) of all estimated average lifetime earnings ($1,494,986) spent on taxes. (The number will be higher in some states and lower in others.)
In addition to reducing income and current wealth, taxes have an “opportunity cost”: Money paid in taxes cannot be used for other purposes, and the “cost” (which can be financial or not) is the loss of the positive outcomes of those uses.
Imagine reducing that number by 10, 15, or 20 percent and investing it, earning an average of 5% yearly. Each dollar you invest would double in value every 14 years! If you earn more than 5%, doubling will happen faster.
Most of us view taxes as a necessary "evil," but the Bible views them differently. Yes, taxes are a reality of life, but as long as human government has existed, there have been taxes of some kind. Taxes are not always fair, nor is our government always willing to spend our money wisely and justly.
A better way to view it may be to view taxes as something we ultimately pay for the Lord's sake. The biblical position is that we are to pay the taxes we owe (but not anymore) with gratitude (and I admit, that's much easier said than done). Dr. Andrew J. Spenser of the Center for Faith and Culture put it this way:
Everyone should pay their taxes in accordance with the laws of the land. Objecting to policies established by the government or the use of the government funds does not, according to Scripture, relieve the Christian of the duty to pay taxes. However, this does not mean that paying as much as possible in taxes is ethically required; using exemptions, deductions and credits in the tax code to reduce your tax bill is consistent with good stewardship.
Jesus gave us some guidance in this area when the Pharisees asked if it was lawful to pay taxes to Caesar, as recorded in Luke 20:22-24: “But Jesus saw through their duplicity and said to them, "Show Me a denarius. Whose image and inscription are on it?" "Caesar's," they answered. So Jesus told them, "Give to Caesar what is Caesar's, and to God what is God's.” (ESV)
The Apostle Paul had something to say about this as well: “For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing. Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed.” (Romans 13:6-7, ESV)
Okay, so owing and paying taxes is something we have to do, along with all the other things we do with our money:
With that said, let's get to it.
Taxes can feel overwhelming, but a little know-how goes a long way. Whether you adjust your withholdings to avoid giving the government an interest-free loan or make the most of deductions, there's real money to be saved. That is true for all income levels but increasingly for higher earners.
Tax minimization is probably one of the underappreciated and underutilized levers in our FLE. I will concede that taxes are boring, and reading about them may be the most tedious thing you'll do today (assuming you keep reading).
But you can reduce the taxes you pay each year if you know how. And those tax savings really add up over a lifetime, especially if you repurpose the money you save to things like giving (increases treasure in heaven), reducing debt (lowers interest), saving (increases current wealth), or investing (increases interest income).
You don't have to be a CPA to understand the U.S. Tax Code. But it does take some work. Let’s start with some basics.
Four main types of taxes nibble away at your paycheck. They're called "payroll taxes" because your employer withholds them as part of their payroll and disbursement processes. That’s a fancy way of saying they reduce your net income.
Employers must legally withhold FICA taxes (FICA stands for the Federal Insurance Contributions Act). This law mandates employers withhold taxes from employee pay and make matching contributions to fund the Social Security and Medicare programs. If you are self-employed, you pay the Self-Employed Contributions Act tax (SECA), which I explain below.
Social Security funds modest retirement benefits (even for billionaires—go figure!). (It also pays income assistance to those in need, which does require a needs test. Interestingly, billionaires don’t have to prove they need it, but poor people do.) You pay 6.2% of your income up to the "wage base limit," which for 2025 is $176,100. That means that someone who makes $750k per year pays the same amount of tax as someone making $176,100; again, go figure! (Many Social Security recipients will receive far more benefits than they paid in.)
Medicare taxes are used to provide healthcare to older people. It's 1.45% of your income, and your employer has to withhold it. After that, things get a little more complicated as Medicare doesn't have a "wage base limit" like Social Security does. You'll have to pay an additional 0.9% in Medicare tax for a total of 2.35% if your Medicare wages are above a certain amount based on your filing status ($200k if single and $250k if married), as does your employer.
If you are self-employed, you must pay the SECA tax of 12.4% for Social Security plus Medicare (2.90%), a total of 15.3% (=12.4% + 2.9%). However, since self-employed people act as their employers, they can deduct the employer's share of SECA taxes (i.e., 50% of them) as a business expense. Also, if net income from self-employment is below $400, it won’t trigger the SECA tax.
Federal Income Taxes are the "big gorilla" because—you guessed it— they fund the federal government's operations, including defense, welfare payments, transportation, education, veterans’ benefits, and much more.
Federal income taxes are the highest tax many people will pay (although about 40 percent of the population pays little or no income tax). They can also be the most difficult to predict and calculate because they vary by individual based on various factors (income, withholdings, deductions, filing status, age, health, employment, etc.). We'll be digging deeper into this in subsequent articles.
State Income Taxes are like federal income taxes levied by the states. The rates differ by state; some have flat rates, others are progressive, and a lucky few have none.
The state I live in, NC, as of Jan. 2025, has a flat rate of 4.25%, which is relatively low for states that tax income. Because it's a flat rate, it's applied after deductions without regard for what income bracket you might be in. NC also has a standard deduction of $12,750 for individuals and $25,500 for married couples filing jointly, so you don't start owing taxes until you've earned at least $12,750.
In my state, we also have to pay sales tax, which ranges from 2% to 7.5%, depending on where you are (it's 7% where I live), an average property tax of 0.855% in the county where I live, city tax, and tangible property tax on cars and boats.
These all add up, which is why it's so important to understand, monitor, and reduce taxes as much as possible! The following few articles will be about this.
For reflection: We need to be honest—even Christians hate the corruptness of the IRS. But no matter how unfair, wasteful, and corrupt the tax system is, we still have to pay our income taxes and other taxes. The “they’re always ripping me off” statement is never an excuse to cheat on your tax returns. We are to have nothing to do with anything illegal and submit to our authorities (so long as they are not in direct conflict with Scripture). Even Jesus paid taxes. So, what about you? Do you struggle with your attitude at tax time? Why? How do your attitudes line up with Scripture?
Verses: “Let every person be subject to the governing authorities. For there is no authority except from God, and those that exist have been instituted by God. Therefore whoever resists the authorities resists what God has appointed, and those who resist will incur judgment. For rulers are not a terror to good conduct, but to bad. Would you have no fear of the one who is in authority? Then do what is good, and you will receive his approval, for he is God’s servant for your good. But if you do wrong, be afraid, for he does not bear the sword in vain. For he is the servant of God, an avenger who carries out God’s wrath on the wrongdoer. Therefore one must be in subjection, not only to avoid God’s wrath but also for the sake of conscience. For because of this you also pay taxes, for the authorities are ministers of God, attending to this very thing. Pay to all what is owed to them: taxes to whom taxes are owed, revenue to whom revenue is owed, respect to whom respect is owed, honor to whom honor is owed” (Romans 13:1-7, ESV).