Being your own boss is exciting. You get to work on your dream, decide your own schedule, and create jobs for others.
But there are some downsides that come with the entrepreneur lifestyle. One of the biggest downsides is that unless you’re intentional with it, it’s easy to overlook the importance of paying yourself a regular salary.
Surveys show that only half of business owners pay themselves a salary. And of those who do, a majority only pay themselves enough to get by.
Many business owners draw random amounts of money from their business whenever they need it. In fact, many small business owners haven’t established boundaries between business and personal accounts – they simply take funds from either account to replenish the other whenever necessary.
Obviously, that strategy is bound to backfire at some point. Successful entrepreneurs who are committed to building sustainable businesses understand that creating a firewall between personal and business accounts is crucial.
Part of establishing this firewall is by creating a strategy to pay yourself a regular salary.
While it’s understandable that you want to maximise profits in your business, you must not forget to reward yourself appropriately for your hard work.
Just like other employees, you deserve to be paid a salary. When you don’t draw a regular salary from your business, it can distort the business’ real profits, since your salary should be factored into the company budget.
- I run an all-female kitchen
- Did your spouse just quit? Here is how to show your support
- Are you scared of starting a business?
- How to become the perfect social influencer
Ultimately, whether you pay yourself or not affects the taxes your business has to pay.
That said, it’s not easy to figure out exactly how much you should pay yourself. On one hand, you want to pay yourself a fair wage, while on the other you also want to minimise your business expenses.
Here are some effective tips on how to pay yourself as a business owner:
Figure out when to start paying yourself
When you’ve just set up your business, don’t expect to be able to pay yourself. In the beginning, it’s understandable that you’ll have to focus on investing in your business. With that in mind, it would be counterintuitive to start paying yourself from the business revenue.
The right time to start drawing a salary from your business is when it starts turning profits (revenue minus expenses equals profits).
With a fledgling start-up, the profits may be quite small in the first months and years. Even so, don’t be tempted to take all the profits as salary – that’s the fastest way to kill a new business.
A portion of the business profits needs to go back into building your business.
After your business becomes more profitable, you can consider paying yourself more. The goal, as your business grows more successful, is to be paid the market rate for your role in the business (what you’d pay someone else to do your job). With a successful business, you can also draw an occasional “bonus” or “draw” to compensate yourself for your hard work.
Factor in tax requirements
The taxes you’re required to pay for your business should also be factored in when deciding on how to pay yourself. Familiarise yourself with the taxes you’re required to pay and plan in advance.
Depending on the tax requirements, it might make sense to pay yourself one way over another. In Kenya, sole proprietors are required to report all business income or losses on their personal income tax returns.
That means that they don’t have to file a separate tax return for their business. On the other hand, limited liability companies have to pay a 30 per cent corporate tax rate.
If you’re not sure what taxes you’re required to pay and what the best strategy for your business is, consult a tax specialist. They’ll help you build a tax plan that will keep the taxes you have to pay at a minimum.
Calculate a reasonable salary
The big question for most entrepreneurs is: How much should I pay myself?
Unfortunately, there’s no magic percentage of business profits that should go to paying your salary. While you want to pay yourself a competitive salary, that might simply not be viable for your business.
However, as a business owner, you still have bills that must be paid. Experts recommend that business owners must pay themselves enough to cover their household expenses. Don’t pay yourself so little that you’re constantly stressed about your personal finances.
Look at what similar businesses in your area would pay someone in your role and use that to guide your compensation.
Start with a modest comparable industry salary. In addition, make an effort to live as frugally as possible, especially when your business is in the earlier stages of growth. You can grow your salary as your business grows.
Set your pay day
Now that you have set a reasonable salary for yourself, you should also decide on your payday. Having a scheduled payday will help you plan your personal and business expenses.
You can pay yourself when you pay the rest of your employees or decide on a different payday. What’s most important is to make sure that you have a regular payday – whether it’s weekly, twice a month, or monthly.