We can pretty confidently say that being in control of your own salary is a dream for many people. The realities of this, however, might not reflect your pre-conceptions! As many small business owners know, knowing how much to pay yourself is a complicated process.
So, if you’ve recently become self-employed, here are some things you should keep in mind when paying your own salary.
Make the Most of Accounting Software
Accurate financial tracking is an important part of running your small business. Using a reliable cloud accounting software, or hiring a professional service like one offered by Count, is a good way of tracking where you spend money.
Your salary should come out of your profits – not your revenue. So, it’s important to track where your money is coming in. That way you can identify where your salary is coming from and rightfully assess how much money you’d be able to pay yourself.
By tracking your finances, you can also assess a variety of factors that will affect how much money you end up paying yourself. For example, if you can identify where you might be able to claim tax deductions, your profit for the fiscal year will increase. That means you’ll have more money to either re-invest or pay your salary.
Maintain a Consistent Financial Structure
Rather than taking various, ever-changing sums here and there, make sure your business conforms to a rigid financial structure. By this, we mean that you should be paying yourself, and your employees, a regular sum on a regular basis.
When you start out on your self-employed journey, you should account for this financial structure when you begin making business plans. That way, you can plan out a consistent payment method that keeps you, and your employees, happy.
Employees would feel more satisfied with a regular payment – even if it’s small – rather than random lump sums.
It’s also better for tax reasons to pay yourself a regular sum. If you’re taking out large sums of money from your company, it could be deemed suspicious activity and you could open yourself up to investigation.
When it comes to tracking the financial growth of your company, you would better understand its performance if you were deducting regular amounts rather than occasional random values.
Assess your Worth
Assessing your own worth is not easy. You have to balance lots of things as a business owner including aspects of your personal life. Even if you’re not turning a profit in your first year, you should still be paying yourself.
Personal financial issues, like paying rent or buying essentials, can cause you stress. If you feel stressed, you’ll probably struggle to make business decisions! Making sure you’re financially stable is very important in reducing this stress.
Make sure you pay yourself a regular, reasonable sum of money.
What is a reasonable sum?
A reasonable sum is not an easy one to pinpoint. The government expects you, as a worker, to take a salary from your business. Remember that this salary should be a regular, consistent payment. Choosing the value of this salary is a hard task and there are certain things you should think about when choosing a sum.
Here are some things you should keep in mind:
- Is your pay substantially higher than the employees you hire?
- If you were working in a similar business, in a similar role, how much would they pay you?
- Are your wages representative of the time and effort you put in to the business?
There’s no reason why you can’t research other, similar businesses to find out how their pay structure functions! You could even get in contact with other small-business owners and ask for advice on how they established their structure.
Are you a sole trader or a limited company?
When you become self-employed and set up your small business, you have to decide whether the structure of your business is that of a sole trader or a limited company.
This legal structure can have some ramifications as to how you are able to pay yourself.
If you’re a limited company, the legal structure prevents you from taking money out of the company as you are not the sole owner.
However, if you’re a sole trader, you aren’t accountable to shareholders and you control the profits made by your business.
Our Bottom Line
In summary, knowing what to pay yourself can be a tricky topic. When you choose to become self-employed, you also choose to become your own boss. Managing your own salary can initially seem like a great bonus, but it can throw up some obstacles.
As long as you keep in mind some of the tips above, we’re certain you’ll make the right choices when choosing how much to pay yourself.