Determining How To Pay Yourself As A Small Business Owner In 2 Simple Steps
As a small business owner, one of your biggest concerns may be how to pay yourself a salary especially as your business starts making money. Sure, you've heard the stories of the founders who didn't take a salary for several years and lived on someone's couch while they grew their business, but that scenario is not realistic for everyone and for the most part, you need money to pay your bills and live your life while you are growing your business so what do you do? Let's talk through this.
Determining How To Pay Yourself As A Small Business Owner
Step 1: Subtract your business expenses from your sales
The first thing you want to do before you pay yourself a salary is make sure your business will remain afloat. This means making sure that your operating expenses are paid first (including your tax estimates).
Your monthly business operating expenses as a total amount is something you should be tracking in your business budget (See THIS post on creating a business budget). For the most part, a lot of your operating expenses will be fixed each month e.g. rent, website hosting, salaries etc but when it comes to your variable expenses, you'll have to make estimates based on what you know is coming up.
Your business taxes are dependent on how much your business is making and is something you can calculate on a month to month basis based on your earnings.
Step 2: Break things down into percentages
Next, after you have paid your operating expenses, you can take what you have left over from your business earnings in that given month and break things out into percentages. For example a good break out could be as follows:
- 10% towards your business emergency fund or cash reserves account. Ideally you want to have at least 6 months of business expenses available in this account to help weather a business decline (i.e. for operating expenses, salaries etc)
- 10% towards business profits with plans to make distributions to yourself (and employees) as a bonus every year.
- 20% towards your estimated taxes. This way you are not overwhelmed with figuring out how to come up with funds to pay a large tax bill depending on how much money your business has earned.
- 30% to put back into the business towards operating expenses, new projects, marketing, branding and other business needs to keep your business growing.
- 30% as a salary to yourself
- Once your business starts making a consistent income or a large amount of money, you definitely want to consider paying yourself a base salary as opposed to a percentage, this way you are not pulling out too much money to pay yourself.
- You can also implement a bonus system for you (and your employees) where you earn a bonus based on how profitable the company is over the course of the year.
- Emergency fund fully funded? You can allocate that 10% to your salary, savings for taxes or to another area in your business, keeping in mind #1 above.
Paying yourself a salary does not have to complicated but keep in mind that if your business is still in the early phases of growth and becoming profitable, you want to be mindful of much money you are pulling out to pay yourself a salary. You don't have to live on someone's couch but at the same time paying yourself a salary should not bankrupt your business.
If your business is not yet profitable, it might not be a bad idea to have a part time job to earn extra income, if your schedule permits it, until your business starts earning a profit.
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