Episode Transcript
[00:00:00] Welcome to another episode of Financial Snickens, your Bite Sized Financial Information, and this week we are gonna be talking about what you should pay yourself. So look, being in business means making. A lot of money, hopefully, but it also requires taking risks and especially financial ones, and as an entrepreneur, you deserve to be rewarded for those risks.
Your pay is just one of the many benefits of your self-employment, but it's not like the pay you get as an employee. It's not just like picking a number for a salary. There are two major ways that you get paid through a business As the owner, you get an owner's draw or you receive a paycheck. If your business is incorporated, you're gonna take a paycheck.
And if your business is a sole proprietor or a partnership, then you're gonna take a draw. And again, as I always say, it's [00:01:00] important to know what type entity your business is. So here's a list of five items that you should have covered with your pay. So number one, it should be reasonable compensation. If you were doing the same work for a company that hired you, what would your pay be?
Are you making at least the market equivalent or better? A lot of time entrepreneurs, we focus on only this piece of our compensation when we set our pricing, and that can be a big mistake. There are also tax implications if you don't pay yourself enough because you're trying to avoid the payroll taxes, and there's also con tax consequences if you're paying yourself too much.
So definitely reach out to a tax specialist to find out what's right for you. They actually have a calculator that can show you what you should be paying yourself. Number two, make sure you have a retirement plan in place when you [00:02:00] work for yourself. No one's gonna fund your retirement. Social security will help, but it's really up to you to set aside money for a comfortable future when you either can't work or you decide you wanna stop working.
Four oh Plans are so easy to set up with your payroll and they require very little extra work. Look, we love working with Guideline for retirement plans. They sync with our payroll and they record all the information neatly in our Q B O file. And you can find the link for guideline in our show notes. We highly recommend them for entrepreneurs setting up your 401K plans.
Okay, now benefits three. You need to have benefits. Look employees, they get vacation, health insurance, bonuses. You should too. This should be part of your compensation package as an entrepreneur and there's many tax advantages to it as well. I highly recommend finding a good health insurance [00:03:00] broker. And what I mean when I say a good health insurance broker, it's one who understands the tax implications of setting up health insurance for the owner and even for your team.
They'll also help you, guide you to the best plans for your situation. Okay? Number four, taxes. You need to cover the taxes that will be incurred from your pay. As well as your business profits. So those are two different things. When you get your pay, you have normal withholdings, you have, you know, federal income tax, state and local income taxes, Medicare and Social Security.
So those all come out when you get a paycheck, but they may not be enough because those taxes that come out don't consider the profits from your business. So you might need to factor in some. Some self-employment taxes and you may wanna, if you get a paycheck, you may wanna increase the amounts that are withheld.
And if you take a draw, [00:04:00] you may need to make estimated estimated tax payments. Also, you gotta consider the taxes on your profit. For sole proprietors partnerships, L L C and S-corp, your taxes will be figured on the profits of your business. When you complete your federal income taxes, they do a pass through, which means that all of those profits from your business get put on your personal return.
Don't let this be a surprise to you. If you have a good tax planner, it will never be a surprise and you'll understand this. You also have to pre prepare to pay state business taxes. If your business does business in multiple states, you probably have to file a tax return in many states. And again, a good tax advisor, tax plan, or a tax specialist.
Make sure you have one that you can reach out to and inquire about all this information and they will prepare a tax plan that is custom for [00:05:00] you. Okay, number five, profit. This really comes into play. You should be making money. You take all the risks of your company, you work all the crazy hours, you do all the work, and you should be compensated accordingly.
Your capital's tied up in your business and you should be earning a good return in addition to your salary or the draw that you take out. Making a profit should be your goal. It's the goal for every business, and if you are not, you're setting yourself up for failure because no profits not means you're not getting a return on your investment.
Your complete compensation should cover all of these components that I talked about, and if it doesn't and you feel like you can't afford to pay yourself, then maybe you're not pricing your product or services right? Or maybe there's a volume problem or maybe you're. Model. Your business model needs some [00:06:00] adjusting's.
Look, when you first start your business, it's normal to take a smaller paycheck. When I first started my business, my paycheck was very small. I really only took a little bit of money out. I didn't know what I was doing. I wasn't sure of how to price things. But if you're still doing that, after years of being in business, Or you constantly have cash flow issues related to you taking a salary, then something is wrong and you need to take a closer look at your revenues and your expenses and look, you can come to us because we know how to handle this.
If you want more help or you wanna talk about pricing or how much you should be paying yourself, head over to our website, first steps financial.com, and we can help you. Click on the Let's Chat button and let's talk more about it.
