“How much should I pay myself in my business?” This question always comes up when I’m coaching a self-employed business owner. The short answer is: “It depends!” Yes, it would be nice if I could just give a cookie cutter answer like, “Pay yourself 60% of your profits, invest 10% back into your business, and save 30% for your estimated tax payments.”
There are a myriad of factors that affect the answer. Depending on the complexity of your business and tax situation, you’ll likely need the assistance of your tax accounting professional to arrive at the exact numbers. Let’s look at a few of the things to keep in mind.
How much should I pay myself in my business?
In the start-up phase of your business, you may be paying yourself less – sometimes much less – than your corporate America paycheck. This might be necessary to successfully launch your business, but it shouldn’t continue this way once you’re consistently profitable. And the point needs to be made that if your business is NOT profitable, you’re not going to be able to pay yourself!
I interviewed over a dozen business and creative coaches, and they agreed that the majority of self-employed people undervalue their contribution in the business and thus underpay themselves. In order to refine the amount you should be paying yourself, there’s additional questions to ponder.
What do people with similar skills and responsibility make working for someone else?
If you’re a self-employed graphic artist who used to work in corporate America, you may already know the answer. If you have zero clue, a quick internet search for average salary ranges for your field and location will give you a good idea.
You can ask other, more well-established entrepreneurs the question, “How much should I pay myself in my business?” But be prepared to get the cold shoulder, especially if they view you as competition. You might have better luck in an online forum connecting with others doing similar work in another part of the country who don’t see you as competition.
What roles am I taking on in my business, besides production?
Most entrepreneurs spend time on sales, marketing, business development, among other things. Don’t just pay yourself for the hours worked on a billable project. For example, let’s say that last week I spent 16 hours on financial coaching for paying clients. I also spent an additional 8 hours working on corporate classes and webinars. I spent 4 hours communication with customers and potential clients in person, via phone, and via email. I spent 8 hours at networking meetings and events. Finally, I spent 4 hours invoicing, filing, paying bills, and sending out the weekly newsletter to my email list. For the math-challenged, that accounts for 40 hours.
Although you might argue that I was only “working” 24 of those hours on billable projects, the truth is that the other tasks are necessary for obtaining paying clients and running my business. I should pay myself a fair amount based on the total amount of hours worked.
How much do I need to pay my personal bills?
If you’re not paying yourself enough to cover your personal bills at home, that’s a problem! This is why the first step to managing your money like a boss is to get your personal finances in order. If you haven’t done that yet, put this book down, and go read or listen to Money is Emotional.
Once you have your personal spending plan, you’ll know the minimum you need to pay yourself to cover your personal bills. If you’re married, or otherwise attached, your spouse or partner will appreciate you paying yourself a regular, set amount, so there’s no unpleasant surprises in the personal budget.
You can decide whether it makes sense to pay yourself weekly, bi-weekly, or monthly. Whether this is done via a payroll check or an owner’s distribution of profit will depend on your business’ tax structure, so consult with your CPA on the proper way to pay yourself. Your amounts may vary based on the profitability of your company; however, you should distribute a minimum amount at least monthly unless you’re in the red.
Are there any other factors I missed when answering the question, “How much should I pay myself in my business?” Let me know in the comments below!