So you have a business and it is making money. But you are asking “How Much Should I Pay Myself?” And related are the questions of a) how much you should invest back into the business and b) how much you should save for taxes. While every business is a little different, I will share some basic principles that are easy to manage and do and will keep you motivated to keep going.
In Profit First: A Simple System to Transform Any Business from a Cash-Eating Monster to a Money-Making Machine Mike Michalowicz provides a basic plan for handling the money your business makes – including a formula that answers that question “How much should I pay myself?”.
Two VERY common problems we see in small business finances:
- The business owner pockets all of the income and then does not have money for taxes at the end of the year.
- The business owner uses all of the money to grow the business and never sees any of the rewards.
Or even worse- combine 1 and 2 and you get a business that grows and spends and is not ready to pay taxes or the owner.
Rethinking the profit sheet
Typical business thinking > Sales – Expenses = Profit
Mike Profit First thinking > Sales – Profit = Expenses
The simple idea – control your expenses to manage the profit you desire!
I like this idea because business owners often take nothing out of their business and eventually burn out.
What to do with the money
- How much should I pay myself? (Called owners pay)
- How much do I set back for taxes?
- How much do I set aside to grow? (Called profit)
For a business with less than $250,000 of revenue
- 5% of the revenue for profit to reinvest in the business
- 50% for owners pay!
- 15% for taxes
Therefore, only 30% of the revenue should be part of your business operating expenses.
Your job, as owner, is to control the operating expenses to make this work.
Over $250k of Revenue
As you grow over $250k your numbers will change, but the general principles still apply. Owner always gets paid something and taxes are covered.
Generally I agree with this formula – a great start. Monthly go through the numbers and do this. To help – download Mike’s Instant Assessment worksheet
What I do with the my revenue
Our main adjustment is that we hold back 25% for taxes – which might be overkill in most years – but it helps balance out things in our overall tax bill since we have multiple businesses and other sources of income.
For you, I would recommend you implement Mike’s plan monthly and see how it works – then adjust as needed. You will find just having a simple plan and looking at it monthly will keep you out of trouble with the IRS and make you smile when you get paid.
One other thing…
NEVER HIRE FULL TIME EMPLOYEES until you hit $250k revenue
Links mentioned in this episode:
Profit first Worksheet – This is all you really need.
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