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Generally speaking, how much should I pay myself?

What percentage (%) of profit (before salary) should you pay yourself?

  • 10%

    Votes: 8 23.5%
  • 20%

    Votes: 8 23.5%
  • 30%

    Votes: 4 11.8%
  • 40%

    Votes: 6 17.6%
  • 50%

    Votes: 5 14.7%
  • 66%

    Votes: 1 2.9%
  • 75%

    Votes: 0 0.0%
  • 90%

    Votes: 2 5.9%

  • Total voters
    34

yyes

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I understand this is a question that depends on a variety of factors but how much should you pay yourself? I generally make between 10-15k a month. My expenses are the following:
  • Jobber- 39
  • Marketing expenses- 600
  • Gas-400
  • Insurance -45
  • Wages-2000
  • Variable costs(rental equipment, materials, etc)-1000
  • Total =Approx 4000 dollars.
That leaves me with 6000 dollars. After this, what percentage do I leave as profit, and how much do I pay myself as far as wages go? I am thinking in terms of percentages and I am curious what you guys do.
 
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MJ DeMarco

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Answer is subjective with no hard-and-fast rules, but if you have a net profit (before salary) of $6K, I'd pay myself anywhere from $2-$4k a month. If the number is too low, it could set of red-flags with our good friends at the IRS. Profits are taxed lower than earned income, which is why you can't profit $500,000 and pay yourself a $35,000 salary. (Well you can, but you're asking for an unwelcome invitation.)

It's a great question and I will post a poll on it.
 

yyes

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Answer is subjective with no hard-and-fast rules, but if you have a net profit (before salary) of $6K, I'd pay myself anywhere from $2-$4k a month. If the number is too low, it could set of red-flags with our good friends at the IRS.

It's a great question and I will post a poll on it.
Awesome.

Thanks MJ. Im curious what everyone else thinks and does when it comes to this.
 

MJ DeMarco

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AgainstAllOdds

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Answer is subjective with no hard-and-fast rules, but if you have a net profit (before salary) of $6K, I'd pay myself anywhere from $2-$4k a month. If the number is too low, it could set of red-flags with our good friends at the IRS. Profits are taxed lower than earned income, which is why you can't profit $500,000 and pay yourself a $35,000 salary. (Well you can, but you're asking for an unwelcome invitation.)

It's a great question and I will post a poll on it.

What kind of corporate structure is that for?

I'm guessing not an LLC, partnership, or S-Corp since it's pass-through?
 

biophase

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The answer is it depends. The trump single member LLC 20% tax break makes the calculation very complicated.


My question to you is why do you care? Why do you want to pay yourself either $10k or $100k if the money is all yours anyway? Is it due to taxes?
 

yyes

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The answer is it depends. The trump single member LLC 20% tax break makes the calculation very complicated.


My question to you is why do you care? Why do you want to pay yourself either $10k or $100k if the money is all yours anyway? Is it due to taxes?
Taxes and having a healthy business entity.

sure it’s all mine but the business is it’s own entity that needs to remain healthy.
 
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biophase

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Answer is subjective with no hard-and-fast rules, but if you have a net profit (before salary) of $6K, I'd pay myself anywhere from $2-$4k a month. If the number is too low, it could set of red-flags with our good friends at the IRS. Profits are taxed lower than earned income, which is why you can't profit $500,000 and pay yourself a $35,000 salary. (Well you can, but you're asking for an unwelcome invitation.)

It's a great question and I will post a poll on it.

MJ, I actually don’t understand this poll. Is this a tax question? Because if we take taxes out of the equation then does it even matter?
 

biophase

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Taxes and having a healthy business entity.

sure it’s all mine but the business is it’s own entity that needs to remain healthy.

If it’s a tax question then the answer depends on how much your business makes.

I don’t understand what having a healthy business entity means.

What kind of entity do you have and how is it taxed?
 

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Red flags aside. Big deal CEOs like Steve Jobs took a dollar salary and everyone kissed his a$$ for it. It is a matter of perspective.

He still got millions in dividend payments...

I wish we had a full blown tax lawyer on the forum.

As far as the op is concerned... I would still be in a S Corp tax election at this point.
 
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MJ DeMarco

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MJ, I actually don’t understand this poll. Is this a tax question? Because if we take taxes out of the equation then does it even matter?

Absolutely it matters.

Figure out the NET TAXES on $500,000 profit and a $25,000 salary.

Then figure out the NET TAXES on $300,000 profit and a $225,000 salary.

The latter tax cost is a fortune more. (I'm mentioning it from a S-Corp perspective, and I think LLCs are the same.)

You can't earn $500,000 and only pay yourself $25,000 a year, unless you want to get audited.

This type of disparity, while you can try it, is done to avoid payroll taxes. You must pay yourself a commensurate salary according to the IRS, otherwise you're playing roulette.
 

Michael Burgess

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Do you mind me asking what type of business or industry you're in? Put another way, would your business benefit from keeping the capital, and owning more equipment / marketing for more leads / hiring employees, etc.?

If you think you could put the capital to good productive use, I would pay yourself whatever you *need* to cover your a$$, along with a bit of "fun money", and keep pumping the rest into the business. Pay yourself significantly more in the future when the business is cranking, and delay gratification for now.

If your business doesn't need more capital though...

Open another business! :rofl:
 

AgainstAllOdds

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To answer the original question:

I don't think the answer should be written out as a percentage. It depends on your goals at the given time. Considerations include a safety net and your lifestyle.

Personally, I enjoy having security, and keep 3 years worth of living costs in liquid assets. If shit hits the fan, I have enough cash on hand to weather most storms. That peace of mind allows me to make the appropriate business plays at the appropriate time. If I didn't have any money in the bank, then I'd be paying out myself more to have that safety which alleviates a lot of stress.

After securing that "nest egg", I believe that 100% of your income after expenses should be reinvested in the business and scaling.

Let's say your living costs are $50k/year. And you made $50k this year after taxes. So you're paying yourself $0.

But if you make $1M, then you pay yourself 5%.

Living costs are not based on how much you made. They're based on how you want to live with the upper limit being how much you make.

I prefer to reinvest everything I can, but that doesn't come at the cost of being a penny pinching loser. I believe @MJ DeMarco mentioned it in his book - that you don't get rich from not buying a cup of coffee.

We all have things we enjoy and need to find the right balance between maximizing our ideal lifestyle while also maximizing how our future looks.

So I think the question would be better if it was broken down into several thoughts:

1. What's my ideal lifestyle and how much would that cost?
2. What kind of future do I want, and how much do I have to reinvest to go towards that future?
3. What's the perfect mix between the two factors?
4. How does that translate into what I pay myself out?

Right now I'm paying myself out around 20% of what I make and reinvesting the rest. But that number will likely fluctuate in life as I get older.
 
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yyes

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Do you mind me asking what type of business or industry you're in? Put another way, would your business benefit from keeping the capital, and owning more equipment / marketing for more leads / hiring employees, etc.?

If you think you could put the capital to good productive use, I would pay yourself whatever you *need* to cover your a$$, along with a bit of "fun money", and keep pumping the rest into the business. Pay yourself significantly more in the future when the business is cranking, and delay gratification for now.

If your business doesn't need more capital though...

Open another business! :rofl:
Yes. My business is in tree services and landscaping. Right now I am putting 500 dollars every month in SEO. I want to grow fast but the problem is that this is my side hustle and I have not been generating 10k plus until 2 months ago.

Before I take the plunge, I want to make sure that this continues for a few more months.
 

biophase

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Absolutely it matters.

Figure out the NET TAXES on $500,000 profit and a $25,000 salary.

Then figure out the NET TAXES on $300,000 profit and a $225,000 salary.

The latter tax cost is a fortune more. (I'm mentioning it from a S-Corp perspective, and I think LLCs are the same.)

You can't earn $500,000 and only pay yourself $25,000 a year, unless you want to get audited.

This type of disparity, while you can try it, is done to avoid payroll taxes. You must pay yourself a commensurate salary according to the IRS, otherwise you're playing roulette.

What I meant was if we don't care about the taxes, what does the amount that you pay yourself matter? I think that OP was asking for a different reason, and not really thinking about taxes.

If you make $500k, you can pay yourself $100k. If you make $300k, you can pay yourself $100k. I'd argue that $100k salaries are within the normal range of a CEO of a $300k to $500k company. So the percentage question doesn't make sense to me.

But, did you know that if you make $500k and are a single member LLC taxed as an S corp, you actually pay less taxes by paying yourself $150k than paying yourself $40k? It's not much of a difference, but it does come into play.

This is because if you make $500k and pay yourself $350k, your taxable income is $150k and your qualified business income is $350k. This gives you a $30k 199A deduction. If you make $500k and pay yourself $40k, your taxable income is $40k and your qualified business income is $460k. This gives you a $8k 199A deduction.
 
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biophase

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Yes. My business is in tree services and landscaping. Right now I am putting 500 dollars every month in SEO. I want to grow fast but the problem is that this is my side hustle and I have not been generating 10k plus until 2 months ago.

Before I take the plunge, I want to make sure that this continues for a few more months.

I think the real question that you are asking is how much of my profits should I reinvest into my business. It's not really how much should I pay myself. You should pay yourself enough to pay your bills. Doesn't all your money flow through to you anyway. I doubt you are a Ccorp making $70k a year?

You haven't said if you are taxed as an Scorp, Ccorp or just a pass through LLC.
 
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alexkuzmov

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I understand this is a question that depends on a variety of factors but how much should you pay yourself? I generally make between 10-15k a month. My expenses are the following:
  • Jobber- 39
  • Marketing expenses- 600
  • Gas-400
  • Insurance -45
  • Wages-2000
  • Variable costs(rental equipment, materials, etc)-1000
  • Total =Approx 4000 dollars.
That leaves me with 6000 dollars. After this, what percentage do I leave as profit, and how much do I pay myself as far as wages go? I am thinking in terms of percentages and I am curious what you guys do.
This question seems silly to me. Dont you know how much are your expenses per month?
What does the percentage matter?
Its all relative.

My method:

I have a LLC and get lets say 100 dolars per month (the percentages will be accurate
1,5% are my personal taxes, pension plan and health insurance. All of them required by law.
13% business expenses - office rent, accountant, electricity, water, internet.
21% salaries.
So monthly profit is ~ 64%
10% of profit is my yearly tax on profits + 5% to get the money legally out of the company bank account.
This leaves with roughly 53 dollars income.
My personal expenses come to about lets say 25 dollars per month so the answer to your question is:
Pay yourself 25% revenue
or 50% profits.

Do you see why the question is silly?
There are too many factors at play here, its all relative and percetages are irrelevant.
 
D

Deleted78083

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In Belgium we get taxed 50% on the salary and 20% on profits, so i'd pay myself the lowest salary and take the rest as profits, provided i can't make any significant investments to increase the revenue.
 

Lyinx

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In Belgium we get taxed 50% on the salary and 20% on profits, so i'd pay myself the lowest salary and take the rest as profits, provided i can't make any significant investments to increase the revenue.
Sounds like they are promoting businesses over the workers (so probably a lot of small owners that get a share of the profit?) :)

In our business (LLC) I wasn't aware that there is a difference between salary and profits (I was on the opinion they are passed through) and will be checking it out.

Dad has told multiple business owners, "make sure to pay yourself a living wage/prevailing wage based on hours worked, if you cannot pay yourself a decent hourly rate, then your business idea is not worth it or you may need to re-think how you are doing business."
 
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D

Deleted78083

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Sounds like they are promoting businesses over the workers (so probably a lot of small owners that get a share of the profit?) :)

In our business (LLC) I wasn't aware that there is a difference between salary and profits (I was on the opinion they are passed through) and will be checking it out.

Dad has told multiple business owners, "make sure to pay yourself a living wage/prevailing wage based on hours worked, if you cannot pay yourself a decent hourly rate, then your business idea is not worth it or you may need to re-think how you are doing business."

Indeed they are, they are also promoting automisation hahaha
It makes it difficult to start a business because you have to pay a social tax right away, whose minimum is 700€ per quarter, so what most people do is this: they start the business illegaly, then if it works well, they go register their company. It's somewhat tolerated because everyone knows that employee taxes are too high. There is also a status for people that want to create their company while already being employed, it is great, it allows you to make xxxxx€ per year without paying any taxes, and if you make more than that limit, you need to start paying, but then it also means that you make enough to quit your job and live off your own business full time.

So the bottom line is this: pay yourself a minimum salary to pay minimum "employee tax" and invest all the revenue you grow into the company so you don't pay any corporate tax. When do you make money then? When you liquidate: there is no tax in Belgium on capital gain. You can start a business with 1€, grow it to 1 million, and you pay 0% tax when you liquidate. : D So the tax system is fairly "fastlane" oriented.
 

Kid

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Take 10%, reinvest 90%.
Different perspective.
 

JasonR

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This is a very complicated question and will vary depending on your corporate structure, tax residency, residence, etc.

With the recent changes Trump made, there's a tax break for keeping money in a C Corp, as long as you keep it in the business - otherwise it's double taxed.

When you start having foreign structure more options open up, but you are also limited in terms of where you're living. Expats get huge tax breaks with the proper structure, but you're limited to how much time you can spend in the states.

So really, what are you asking? How much should you pay yourself to minimize your tax burden, or how much should you pay yourself regardless of your tax situation?
 

CareCPA

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Sounds like they are promoting businesses over the workers (so probably a lot of small owners that get a share of the profit?) :)

In our business (LLC) I wasn't aware that there is a difference between salary and profits (I was on the opinion they are passed through) and will be checking it out.

Dad has told multiple business owners, "make sure to pay yourself a living wage/prevailing wage based on hours worked, if you cannot pay yourself a decent hourly rate, then your business idea is not worth it or you may need to re-think how you are doing business."
If you're an S Corp or C Corp they're treated differently.
If you're a partnership or single-member LLC, then not so much.

I especially like your dad's point of view. Many business owners work twice as many hours for the same amount of money they could make at a regular job (ask me how I know!).

Edit: To answer OP's question, I would never look at it as a percentage. I would say "what is a reasonable wage for the job I'm doing (i.e. how much would I pay someone else to do the job)."
 

yyes

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For the people telling me that it doesnt matter, of course it does.

My business is its own entity and I want to keep it healthy. I have to be able to determine how much I should pay myself, how much to reinvest, how much for business taxes, etc.

I also have to be able to determine my profit margin for my business and see what is healthy. This is what motivated my question.
 
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amp0193

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I also have to be able to determine my profit margin for my business and see what is healthy. This is what motivated my question.

Short answer: If your business can do 10% net profit, AFTER paying yourself a full salary (at the rate you would pay someone else to do it)... you're on the right track.
 

alexkuzmov

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For the people telling me that it doesnt matter, of course it does.

My business is its own entity and I want to keep it healthy. I have to be able to determine how much I should pay myself, how much to reinvest, how much for business taxes, etc.

I also have to be able to determine my profit margin for my business and see what is healthy. This is what motivated my question.
You are missing the point.
The percent doesnt matter because its all relative.
You should know your expenses for every month, start from there.
 

yyes

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You are missing the point.
The percent doesnt matter because its all relative.
You should know your expenses for every month, start from there.
Right. We use percentages because it’s all relative.

I posted all my expenses in my original post for reference.
 
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biophase

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Right. We use percentages because it’s all relative.

I posted all my expenses in my original post for reference.

So if your business made $100k or $1m you would still pay yourself using the same percentage?

Makes no sense.

Also, your question is backwards. It should be, how much money do you all reinvest into your business.
 

yyes

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So if your business made $100k or $1m you would still pay yourself using the same percentage?

Makes no sense.

Also, your question is backwards. It should be, how much money do you all reinvest into your business.

Would you? If you make 100k vs 1 million would you pay yourself the same?
 

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