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Whether you’ve had a business for a while or are only starting, one of the hardest decisions is how much do you pay yourself. Is there a hard and fast formula used by most businesses you don’t know about? Do you simply take a percentage of the profits?
Do you pay yourself first and everything else after? These are all important questions business owners face, but there are few resources available to help you out. You have a business and deserve to receive the fruits of your labor. If you’re often asking, “How much should I pay myself,” this guide will help you.
How Much Should I Pay Myself?
All business owners ask themselves this question at some point. Their response usually comes in one of three ways. They decide to give themself a salary based on being an employee, use a formula, or take a percentage of the profits.
The reality is that your business income is fluid from week to week and month to month. None of those methods allows for the give and take that you need to have. Your income isn’t a hard and fast formula, and formulas and percentages don’t allow for the imbalances of owning a business.
Instead, you need to take a holistic approach make sure you cover all your business bases before you worry about your income.
What’s Your Profit?
You have business expenses that you need to pay if you want your business to continue. You need to pay the rent or mortgage on your building, add new inventory, pay employees, utilities, and month to month expenses.
You need to take care of all your expenses first before you even consider your salary. You can’t take any money out until you know what you’re working with.
Take your revenues and subtract your expenses to determine your net profit. Ideally, you have a substantial profit after your expenses, but if you don’t then you may have a few lean weeks until business picks up.
If you have been in business for a while and you know the ebb and flow your revenue stream, you can predict leaner months and take a little extra in the months before to make up for it.
Now that you’ve taken out all your expenses and you only have your profit left it’s time to go deeper.
Don’t Forget About Taxes
Many businesses forget to account for taxes for their business revenue. They get caught up with the bills and their income and they forget to take out money for the end of the year taxes. You can hope that you’ll be able to get enough exemptions to offset taxes, but the reality is you’ll likely need to pay taxes.
How much should you save for taxes out of your net income? If you do your taxes, you can assume that about 30 percent of your profits will go towards taxes. If you have a tax preparer, then you can ask them for suggestions on how much to save.
Every business has a unique tax situation, so a tax preparer can give you a better estimate of how much to save based on your actual numbers.
Once you take out your taxes, what’s left is how much you have access to. You’re still not paying yourself yet though.
Subtract Your Business Loans
If you’re like most small businesses, you received a business loan to help get your business started, buy inventory, etc. This expense isn’t part of your overall business expenses and should come out of the profits.
You should take the leftover money and subtract your loan or credit card payments. You may not want to do it this way, but subtracting it now is better than trying to find the money after you’ve paid yourself.
If you end up with money left over after paying yourself, it should go to your business loans to pay them off faster. Also, don’t forget that interest from business loans is tax-deductible.
Do You Plan on Expanding?
You might be happy with your business now, but if you want to increase your revenues, you’ll need to expand. It could be a new product, adding employees, adding inventory, or building an addition to your current business.
How much do you want to save each month for this? Do you have an aggressive plan and want it paid off in a year, or are you looking into the future and want to do it in five years?
Your timetable impacts how much you need to save. Take each item you want to save for and put them into a priority list. Determine when you want to implement each one and how much you need to save for them.
How Much Do You Need to Live?
The money that’s let is how much you get to work with for your salary. Before taking it and running to the grocery store, determine what your base needs are. Consider your expenses and revenue from outside the business, such as a spouse’s income, and determine what you need to survive.
Why? Odds are the money left over is less than what you need to survive. It’s a part of the business.
You then need to go back over your expenses, business expenses, and savings and see where you can make cuts to meet your minimum goal. You may want to remodel the business bathroom in a year, but you may have to live with it a bit longer and put that money in your salary.
Don’t forget to create your pay stubs online to keep for your records.
How much should I pay myself? You should pay yourself at least your bare minimum using the remaining profits. If you’re lucky, there’s more than the minimum.
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