It’s no secret that one of the hardest things to do when you’re starting your business is deciding how much to pay yourself from your business. Knowing what money to spend investing in the future of your business while also making your personal ends meet can be hard to balance.
Paying yourself is just as important as taking care of your overall business health. How small business owners pay themselves has a huge effect on their business' ability to grow and if their business is meeting their personal financial needs.
If you’re not paying yourself enough, your personal life suffers. If you’re paying yourself too much, your business won’t be able to grow and you may even cause it to fail. So how much should you pay yourself as a business owner?
It all comes down to your financial goals for your business and yourself as well as the overall financial health of your business.
What are You Worth to Your Business?
Figure out what’s more important: paying yourself enough to get by or paying yourself what you’re worth. As a business owner, you have two choices, you can pay yourself enough to get by and reinvest in your business or you can pay yourself what you’re worth.
Just like you wouldn’t undervalue an employee, you shouldn’t undervalue the time and work that you put in as an owner. But deciding what you’re worth to your business? That has a lot to do with your money mindset and can be really hard to figure out if you have hold ups about money.
Instead of approaching your business from the perspective of what you’re worth, it’s much easier to think about your overall business financial plan and personal financial goals. What does financial success look like to you?
Don’t forget it’s okay to dream big, even if your business books are an absolute mess right now and you’re struggling to pay yourself. After all, a goal is what guides your business towards the future, not an expectation of the amount of money you pay yourself today.
Write down your big, audacious goals for your business and personal finances and work on developing a small business financial plan. That will give you a clear picture of where you want to head—and how you should be paying yourself now.
Calculating Your Minimum Owner Pay Rate
How much money do you need to live and hit your baseline of personal financial goals? That’s how much you should be paying yourself at a minimum to make sure your business is meeting your personal financial needs.
A “pay yourself first” rate is simply working backwards from your personal expenses to get how much money you need to pay yourself from your business.
To get your “pay yourself first” rate, get together a list of all your personal expenses, like your mortgage or rent, insurance premiums, loan payments, food expenses, and more. Don’t forget to include the minimum for retirement savings, emergency savings, and other savings goals you have.
Once you have this number, you’ll want to factor in self-employment taxes but you’ve got a baseline number that you need to pay yourself from your business to cover expenses. As long as you’re paying yourself this amount from your business, you’re covered!
What to Do If You’re Struggling to Pay Yourself
What should you do if you’re not paying this minimum owner rate? If you’re struggling to pay yourself enough to live, the problem may be a profitability or cash flow issue. Figuring out which one of these two issues is causing the problem will give you direction on the right steps to take to solve the problem.
If there’s just not enough money in your business to pay yourself after you’ve paid business expenses, you have a profitability issue. You need to work making your business more profitable by reducing your expenses, bringing in more money in your business, or a combination of both.
On the other hand if you’re struggling with the timing of when you pay yourself, you have a cash flow issue. It’s not that you don’t have enough money in your business, it’s just not there when you need it to pay yourself. Fixing cash flow problems can make a huge difference in the timing of paying yourself if that’s your struggle.
How Much Should You Pay Yourself? And How Should You Pay?
After you’ve calculated your minimum owner pay rate, you can use it as a baseline to figure out what you need to be paid. But, of course, you didn’t start a business just to make the bare minimum, right? That’s where paying yourself more than your minimum gets complicated.
It’s a good idea to talk to an accountant to help you figure out how much you should pay yourself and how that should be done, especially if your business has grown beyond just you. How you pay yourself also as to do with the legal structure of your business and taxes so it can get pretty complicated!
Logistically speaking, there are four ways you can pay yourself in your business: a paycheck, an owner’s draw, distributions, and dividends. Each of these has different strategies to reduce the taxes you’ll pay and is often based on how much money your business is making.
If your business is just you and you’re making under a certain threshold, you’ll usually pay yourself with an owner’s draw instead of using self employed payroll. It’s usually as simple as writing a check to yourself from your business bank account of what’s left over after covering expenses on routine intervals.
After your business grows or if you set up your business differently, it can get pretty complicated. Paying yourself a salary when self employed as well as with another form of payment beyond that salary is usually how you pay yourself after you’ve hit a certain threshold of success. How much you pay yourself in a paycheck amount should usually be based on your job titles and duties, even as the business owner, so you keep the IRS happy.
After paying your salary to yourself, there still may be more you can pay yourself if your business is doing well. This can come in the form of an owner’s draw, distributions, or dividends based on how your business is set up.
Keep in mind that you don’t want to mess this up! There’s a lot of tax stuff that goes into figuring out how much to pay yourself and how to actually get that money out of your business and into your bank account. Talking with an accountant can really help here.
How to Start Actually Paying Yourself From Your Business
As an entrepreneur, you may feel the need to always put yourself last. Paying yourself is just as important as making sure your business is running smoothly and is healthy. Personal finance and business finance go hand in hand and can affect one another.
The problem most business owners face when they’re struggling to pay themselves is they have no idea what’s going on with their business finances and don’t have a strong financial background and don’t know a lot about financial management. You’re not alone if that’s the case! I created Not Rocket Finance to help small business owners learn the basics of finance to run their businesses that solves problems like struggling to pay yourself.
If you’re not ready for a full-blown course yet that will help you get a handle on your small business finances, the first step is to do a small business financial health check to see how your business is doing and how you can start improving your finances. Download my free guide to get started and get on track towards paying yourself what you’re worth!