In this week’s issue of Profit & Joy Simplified, let's talk about how much you should be getting paid when you're both the CEO & owner of your business.
It’s difficult to figure out how much to pay yourself, right?
I get asked about this a lot so I decided to address it in a newsletter.
While there are certainly other methods, I have found one that makes good business sense, but it's also logical and easy to remember. Which makes it simple. And simple is the best. :)
Once you've used this method to figure out how much to pay yourself, your confidence will soar knowing you’re making an informed business decision.
Ready? Let’s dive in.
Common Owner’s Pay Strategies to Avoid
Some popular methods I’ve seen to determine how much you should pay yourself…and I don’t like any of them:
Pay yourself based on how much you need to take home
Pay yourself a huge amount
Pay yourself a tiny amount
Pay yourself nothing
Are you nodding your head at these? Which one are you doing right now? Or have you done? No shame. Until you’ve been taught differently, these seem logical.
But the thing is, none of these were calculated based on business concepts. Since you're in business to make a profit, we need to think through this decision like we would any other business decision.
How Much Should I Get Paid?
The answer to this question lies in the roles you fill within your business. You fill 2 roles & should be paid for each of them:
First, you should think of yourself as a worker/doer. You contribute to your business with your own work.
Even if you're not doing actual hands-on client work, you're still filling the role of CEO.
So the first part of your pay equation is simply “how much would I have to pay someone else to do the work I'm doing for the business?” The fair market value - not $3 an hour or $3,000!
Why do you need to do this?
At some point, you may grow & scale your business to the point where you want/need to replace yourself for the work you're currently doing. You need to have that money set aside already in compensation.
It doesn’t reflect the true health of your business if you aren’t being paid for the work you do.
As the owner, you're the one taking the risks and responsibilities of the business. As such, you're also the one who's rewarded when the business is well-run and profitable.
So your second form of pay is from profit.
A portion of the profit your business makes should go to you as what I call “owner’s choice.” You can decide if you want to pay it to yourself - or bonus employees or do whatever you want. It's the reward you get for taking on the risk of a business.
Each month, calculate profit & set aside a portion for paying taxes, for reinvestment in your business (including a rainy day savings fund), and for owner’s choice.
[Tip: that’s what I call becoming a PRO at Profit - Pay taxes, Reinvest, Owner’s choice - but that’ll have to be another newsletter!]
What We Left Out: Tax & Legal
Business decisions have both tax & legal implications. Those are important - and they do affect HOW we actually end up paying ourselves.
Consult with your tax professional as to how you need to set up the pay according to your business’s tax filing status. Don’t skip that step because it matters.
What if My Business Can’t Afford to Pay?
If you’re just starting out, you might not be able to pay yourself at all yet. Or you may not be able to pay yourself that calculated fair salary. Many businesses operate at a loss for the first few months.
Pay yourself something because not paying yourself feeds into scarcity mentality and fear. You have personal bills to pay - and burnout comes much quicker when you aren’t being paid for your roles.
Decide on a period of time that you're willing to work for this reduced pay. And then that’ll spur you on to set an action plan so you will have the funds to pay yourself a fair salary.
According to a 2022 small business survey from Wave, 26% of small business owners don’t pay themselves. Wowza. Let’s not fall into that 26%, okay?
By figuring out how much to pay yourself both as a worker and & owner, you'll be motivated even more to create a well-run profitable business that you and your team will love.
Nailing down how much you should pay yourself by looking at the roles you fill for your business will give you an immediate boost of confidence. Treat your business like a business, not a hobby - based on numbers and intentional strategic plans.
1. How much to pay yourself is a common question
2. Common strategies make no sense
3. Pay yourself based on roles
4. Don’t pay yourself $0
5. Confidence soars!
Thanks for reading! Hope you found this helpful.
See ya again next week, my friend!
Whenever you're ready, there are 3 ways I can help you:
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