Once you go into business for yourself, you’re obviously no longer receiving a stable salary from a business who employs you. No kidding, right?
So, when all the dollars and cents flow though you alone, whether expenses or income, you have to deftly manage how to actually pay yourself properly.
How this happens, and how much you pay yourself, will be contingent on:
- what type of business structure you operate
- how much you invest back into your business
- how much cash flow you have
- what your business expenses are
- what your living expenses (or living aspirations) are.
Let’s break down some typical strategies to figure out how to pay yourself as a business owner.
Why is paying yourself correctly so important?
You may have a thriving business that covers its expenses and generates great cash flow. Maybe you don’t.
How much you actually withdraw from the business funds to pay yourself a living wage will have wide reaching ramifications.
On one hand:
What if you need that extra capital you paid yourself to invest in an opportunity, pay staff, buy stock, pay rent, or fix a broken asset?
On the other hand:
What if you can’t pay your own mortgage or rent, put food on the table, or have enough money to live comfortably?
It’s a big deal, so let’s break down the different criteria at play when considering how to pay yourself, and how much.
What type of business structure do you operate?
What type of business structure you operate will have drastic implication on paying yourself?
Sole trader
When A sole trader wants to be paid, they simply withdraw profits from the business. It’s important you keep records of these withdrawals as they are ‘income’ and will impact the tax you have to pay. Use your accounting software for sole traders for this.
Equally as important is to keep aside a percentage of your earnings to be kept in another account for your tax bill. In this way, you should withdraw a regular and sustainable amount for yourself, at the same time as putting away your tax bill.
To keep things tidy, only use a business account for business expenses, and a personal account to withdraw money and pay yourself.
Partnership
A partnership works the same as a sole trader. The only difference being that you should have a partner agreement in place to ensure fairness and legal obligations are accounted for when you withdraw business funds as personal income.
Company
A company works differently. If you have a company business structure, you’re paid a salary just like any regular employee.
Your salary is a known expense on the books and will be taxed as personal income.
Many company owners will pay themselves a reasonably modest salary, to be augmented by dividends from any profits.
If you want to know more about business structures, how they operate, and how to choose them, read our article here.
How much do I pay myself as a business owner?
How much you pay yourself as a business owner depends on a number of factors, particularly based on the health of your business. It’s all about balance.
Finding the balance between comfortable living and business health is the key.
What do you need?
Based on a budget, calculate your monthly household and personal expenses. Be sure to include a buffer for unforeseen events and rainy days. Don’t forget to factor in super and other retirement needs.
This should be your base salary.
If your business is doing well and profits are high, gift yourself bonuses to reward yourself without putting the business in peril. This is the way you should earn more than a base salary – bonuses based on profits.
What does the business need?
The business needs to be able to cover all expenses and expected outlays. This includes staff, stock, bills, insurance, rates, and rent etc.
You also need to add a buffer for reinvestment, poor cash flow periods, and unexpected asset damage.
Once you have business expenses covered and household expenses accounted for, you can choose to reinvest or take bonuses. Be careful not to draw too deeply on your business balance, as complications like COVID-19 can arrive. At the end of the day, fairness and balance is key.
