How Much Can YOUR business Afford to Pay Your Most Valuable Employee (Hint... It's YOU!)?!

How much can your business REALLY afford to pay you?

You made the leap to self employment and struck out on your own. BRAVO! 

If you’re anything like us, you made that jump because you wanted to have financial freedom, flexibility, and to continue doing something that you love.  And if you’re really like us, you didn’t plan on working for free.

Don’t get me wrong, we totally get it, it’s a very fine line!  If you pay yourself too little, you can’t afford to eat; on the other hand, if you pay yourself too much, you might put your business at risk and not be able to afford important business expenses (like rent, payroll, or paper).  But how do you find the right balance?

Well it may be a fine line, but we’ve worked hard to take the guesswork out of the equation.  You can find our business owner paycheck calculator here.

But before I get into that let’s talk a little bit about your business!

Business, Profits, and Pay

Ideally, you should be paying yourself out of your profit. But to do this, your business must be profitable.  Which means you need to have more income than you have expenses. The first step is to identify your income and expenses; accounting software can really help you identify your income and expenses.  If you need help choosing a software, you can read our Accounting Software Roundup here.

In your first year of business, you may NOT be profitable just yet… maybe you’re still accumulating clients, paying down debt, or dealing with high startup expenses; and that is OK! All of this is very important to a new business, but this doesn’t mean you should work for free.  

Yes, we know that money doesn’t grow on trees, and that paying yourself might mean needing to borrow to pay yourself, but trust us when we say this is a wise investment in your business.  You don’t want to be distracted by your personal finances while you’re trying to grow your small business. So while I know it’s scary be sure to budget out enough to pay yourself even if you’re not quite taking a profit yet… it is incredibly necessary for the long term health of your business.   

Now if this isn’t your first year in business and you’re not profitable.  

My first question is... “Why”?!

My next question is “What can you cut out”?  

And my recommendation is that you cut your owner's draw down to bare bones so you can work on regaining the financial health of your business instead.

Practical Pay Guidelines

Along those lines, we strongly discourage you from dipping into your business funds when you need personal funds.  Your “draws” should be carefully calculated and regularly recurring.  As opposed to when you need them or want them.  Your payments should be the same and scheduled at regular intervals.  Whether that’s weekly, monthly, or on the 1st and 15th. Set an amount and pay it on schedule.

If you are a sole proprietor, partnership or single member LLC these draws can be as little or as much as you want, and whenever you want.  They could be as simple as an automatic transfer from your business to personal checking accounts every Friday. If you need help determining your draw amount be sure to download our worksheet.

If you are a C or S Corporation, these “draws” need to be run through Payroll.  If you are an S corporation the amount you decide to pay yourself not only needs to run through payroll but needs to be “reasonable”. If you need help determining reasonable compensation for your business check out this blog post here.

Every business has a magic number for how much their owner should be drawing.  What’s your magic number? Are you unsure? Well you’re in luck! After helping hundreds of small business owners just like you, we put together a PROVEN calculator in one, simple-to-use “Pay Yourself Now Worksheet.”  This worksheet will help you calculate the right amount for your salary, and you can do it right NOW.   

Download our “Pay Yourself Now” Worksheet here!

So what are you waiting for?

Disclaimer This article presents general information and is not intended to be tax or legal advice.  Refer to IRS publications and discuss possible tax deductions with your tax preparer.