One of the most common questions we receive from our customers is "How much Should/Can I Pay Myself" There is not one, simple answer to that question, (typical accountant answer, right?) but we've found the guidance below to be spot on.
Balancing what the business needs to grow, keeping enough cash in reserve for an unexpected financial hurdle (customer doesn't pay on time), and paying yourself enough to make it worth your time and energy are all important factors to consider.
If you’re looking for a comprehensive guide to help you decide what is appropriate to pay yourself we’ve got a few helpful tips for you.
Take care of yourself, but take care of your business too. Try to find an amount that is good for both. Pay yourself reasonable and regularly and make sure that it is an amount hat you can live on. If you’re still not sure, research what people with your same position and qualifications in your local area are making. It’s important to know that you may not be making quite what you deserve when you’re first starting out. But just remember that it’s temporary.
The more you invest in your company, the faster it will grow, which will pay off and eventually you’ll be able to pay yourself more.
Each month, before paying yourself, make sure you take care of all of your expenses first. Your salary should come out of leftover profits. Invest in some quality accounting software to help you easily keep track of your business’ When looking at growing profits it can be tempting to quickly give yourself a raise, but make sure that you reinvest in your business first. Not only will this improve your business, but reinvested money is typically taxed at a lower rate than money that is removed from the company.
A question that many first-time business owners have about paying themselves is if there is ever a situation in which they should consider not paying themselves. Our answer is simple. While you shouldn’t refuse yourself of payment on a regular basis, if the business is struggling, you may want to consider skipping a pay period, or paying yourself less.
After figuring out what an appropriate salary for yourself, the next thing you should think about is being tax-efficient. Do your best to figure out the most tax-efficient to withdraw funds from your business. Keep these things in mind when you’re trying to be tax-efficient:
Be Consistent -Paying yourself and your employees on a consistent basis will most likely avoid concern from your local tax agency.
Give Yourself the Occasional Bonus-Giving yourself a bonus every once and a while can sometimes be tax-efficient and it doesn’t hurt for your personal finances either.
Mix Salary & Dividend Payments-This is for those that also own shares in their company. If this is you, consider taking a portion of your salary as a dividend so that it can be taxed at a lower rate.
*Make sure you take into consideration your local tax agency’s rules and regulations.
When it comes to paying yourself, just remember to do what you can to give yourself what you deserve while still keeping the best interest of the business in mind. When your business grows, you can think about the option of increasing your salary.
For a more detailed outline on what is an appropriate amount to pay yourself, check out this article from our friends over at Xero.