How Much Should You Pay Yourself?

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How Much Should You Pay Yourself?

How much should you pay yourself?

So many entrepreneurs falter here and end up paying themselves less thinking that it’s better for the business or that they’re being greedy by taking too much.

The truth is that too many entrepreneurs are underpaying themselves. Here’s what I mean. If you’re paying yourself $2,000 a month and you really should be paying yourself $3000, you’re missing out on $12,000 a year. That’s a couple family vacations or a significant amount of savings!

Business owners are way over-complicating this. Here’s how you can think about this.

Paying yourself is not all that different from getting paid by an employer. When you get your paycheck, you distribute your income between bills, food, fun, and savings if there’s anything left over.

The main difference when you own a business? You have to pay your own taxes.

I know it’s tough to part with your hard-earned cash, so the first mindset shift I want you to take is that not all of your hard-earned cash belongs to you.

I know, I know. I don’t like it either. I’m only here to help guide you along.

Formula: How to Pay Yourself

To make this easy, I have a formula you can use to figure out how much to pay yourself. (If you want, you can download the worksheet I have for free here in my resource library.)

Take this example: You’re making $10,000 per month (congrats!).

In Canada, that means your marginal tax rate is %26. (You can reference this list for tax rates in America.) So, I would distribute income like this:

  • %1 profit – $100
  • %23 expenses – $2300
  • %26 tax – $2600
  • %50 payroll – $5000

To keep things organized, each of the lines above should have their own bank accounts. My favorite is Tangerine.ca. (If you open an account before April 30, 2017 with a minimum of $100, you’ll earn $50. Just use my Orange Key {16898465S1}. Yay for free money!)

Why did I write 1% towards profit?

Mike Michalowicz, author of the book Profit First, explains this best. He says, and I’m paraphrasing, that we’ve learned to pay ourselves first — before bills — so we can relate that lesson to the profit we earn in our businesses.

He says that most businesses don’t make a profit, but this percentage system ensure one because you’re taking your profit out before paying bills and payroll. By following this system, you always have a profit at the end of the year, which you’ll clearly see when you close your books.

While 50% towards payroll may seem very generous, it’s reasonable if you compare it to an average wage of middle-income earners in the US.

Then you’re looking at between 2,000 – 3,000 take home pay each month. If you have contractors. you’ll be looking at another 1,000 – 2,000 in expenses.

So, like so many things in life, how much you decide to pay yourself is subjective. My biggest piece of advice is to make sure you think about taxes all year long, instead of just at the end of the year. I know so many business owners who spend, spend, spend and wonder why they don’t have a profit or enough saved up for taxes.

To sum it all up: First, determine how much you’re spending on expenses (not including subcontractors), find your tax bracket, always put away 1% profit, and work up to take %50 for payroll.

Now, this may take awhile, so be patient with yourself. Learning how to manage your money as a business owner is definitely a journey, but you wouldn’t be here reading this if you weren’t up to the challenge. 🙂

Click here to get free access to my library of financial resources so you can download the worksheet that will help you figure out how much to pay yourself, too.

Have questions about a more specific case or business? Let me know in the comments below.

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