Generally speaking, how much should I pay myself?

[MJ DeMarco]

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.

 

[AgainstAllOdds]

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.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MJ DeMarco]

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.

 

[theag]

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.

Fully agreed, thats what I'm aiming for, too.

In the past I tried to push net profit to near 0 to avoid taxes, by increasing marketing spend, buying stuff, etc. I only recently realized that this was hurting the business in the long-term.

Highly recommend reading "Simple Numbers, Straight Talk, Big Profits". Absolute eye-opener for me.

Here's a good summary of the most important points in the book: “The Four Keys” from Greg Crabtree’s “Simple Numbers, Straight Talk, Big Profits!”

Regarding salary, I try to set it to a tax-optimized amount. For my business entity, I pay around 33% corporate taxes on net profits. So I set my salary to an amount where the sliding scale of personal income tax amounts to around 33%, which comes out to around max. 120k Euro / year pre-tax after including add-backs for health insurance etc. Personal income tax in my country actually goes up to 42% (45% for really high income), so everything on top I keep in the business to reinvest or use it as equity reserve, because its taxed at a lower rate.

I balance this with the goal of 10% net profit. So if a 120k/y salary would mean not getting 10% net profit, I lower it until the business becomes bigger / more profitable.

The big payday will come with a sale of the business. With the right tax-optimized holding structure the sale will only be taxed at 1,5% (no typo), as long as the proceeds stay in / are reinvested from the holding company.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[yyes]

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.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[MJ DeMarco]

Awesome.

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

As am I, please vote everyone!

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[biophase]

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

That 20 percent tax break for small businesses is no free-for-all. How to navigate

If you're rushing to incorporate your small business so you can grab that 20 percent deduction, slow down. Here's what you should consider first.

www.google.com

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?

 

[Deleted78083]

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.

 

[CareCPA]

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)."

 

[biophase]

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.

 

[Kung Fu Steve]

I did 50k/year until I had over 6 months of expenses saved in case something went wrong. With that cushion I started taking significantly more without increasing my personal expenses in case I needed to take a pay cut.

I was pretty conservative though.

The health of the business was always more important than the individual. I don't know if that was right or not but it worked for me.

 

[JustinY]

I recommend checking out a book called Profit First. I read it in preparation for getting my head around running my own business and one of the things that the author talks about is Target Allocation Percentages.



He pretty much summarizes the entire book in a free PDF on his website.
The idea is that once you cross a certain revenue, you're hiring people to do the work that you were doing before, so your salary goes down, but your profit % goes up.
If you're starting at low percentages, go up by 3% a quarter split between the various buckets until you get to the target.

Also keep in mind the difference between Revenue and Real Revenue where Real Revenue = Revenue - Materials - Subcontractors.


The book helped me wrap my head around where my business "should" be versus where it is now. Also useful in evaluating business for purchase.

 

[amp0193]

Highly recommend reading "Simple Numbers, Straight Talk, Big Profits". Absolute eye-opener for me.

That's the book that changed everything for me, and reading it turned my business around overnight.

I realized my "profit" was a joke, because I was paying myself half what I was worth.

I learned that my "target" employee budget was negative $50,000, making me realize that my gross margin was too low, and I needed to significantly raise prices. I had been bleeding cash for 2 years and the fix was that simple.

 

[biophase]

No. I am asking how much to pay myself. I invest 35 % in operating expenses, set aside 15% for taxes. The rest would be profit. But profit would depend on the percentage I pay myself.

To answer your question, you paid yourself 50k, hence the 50k salary.

Ok, I can see where you are coming from. I think the difference in our thinking is that my businesses are running at alot higher numbers than you at this point.

If dentist has a business that makes $100k. It is bad business because a dentist's salary should be $250k. So you are actually losing $150k running this business.

If this same business makes $250k, the dentist pays himself $250k, the business profits $0.

If this same business makes $600k, the dentist would still pay himself $250k (because that's a normal dentist wage) and the business profits $350k.

So based on the above example, if you are running a dental business and not making $250k/yr, your business is not doing good, even though you think you are doing fine. According to the link you sent me, 5% pre tax profit is still not good. So a dental business making $262k is not good. However, 10% is good, so a dental business making $275k is doing good in their eyes.

Once you start making more money, >150k, you will understand that the amount you "pay" yourself won't depend on what salary you want, but how it affects your taxes.

Going back to my above example where you said "you paid yourself 50k, hence the 50k salary", how do you see the $100k that I used to put into my personal savings. I don't understand how you don't see that as getting paid? I took it out of my business and put it into my personal bank account.

 

[AgainstAllOdds]

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?

 

[yyes]

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

That 20 percent tax break for small businesses is no free-for-all. How to navigate

If you're rushing to incorporate your small business so you can grab that 20 percent deduction, slow down. Here's what you should consider first.

www.google.com

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.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Kak]

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.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Michael Burgess]

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!

 

[yyes]

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!

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]

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.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[alexkuzmov]

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.

 

[Deleted78083]

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]

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."

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[Kid]

Take 10%, reinvest 90%.
Different perspective.

 

[yyes]

Take 10%, reinvest 90%.
Different perspective.

I was thinking 15% and reinvest everything.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[yyes]

Fully agreed, thats what I'm aiming for, too.

In the past I tried to push net profit to near 0 to avoid taxes, by increasing marketing spend, buying stuff, etc. I only recently realized that this was hurting the business in the long-term.

Highly recommend reading "Simple Numbers, Straight Talk, Big Profits". Absolute eye-opener for me.

Here's a good summary of the most important points in the book: “The Four Keys” from Greg Crabtree’s “Simple Numbers, Straight Talk, Big Profits!”

Regarding salary, I try to set it to a tax-optimized amount. For my business entity, I pay around 33% corporate taxes on net profits. So I set my salary to an amount where the sliding scale of personal income tax amounts to around 33%, which comes out to around max. 120k Euro / year pre-tax after including add-backs for health insurance etc. Personal income tax in my country actually goes up to 42% (45% for really high income), so everything on top I keep in the business to reinvest or use it as equity reserve, because its taxed at a lower rate.

I balance this with the goal of 10% net profit. So if a 120k/y salary would mean not getting 10% net profit, I lower it until the business becomes bigger / more profitable.

The big payday will come with a sale of the business. With the right tax-optimized holding structure the sale will only be taxed at 1,5% (no typo), as long as the proceeds stay in / are reinvested from the holding company.

Exactly the type of answer I was looking for.

Thank you.

 

[biophase]

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

No. But I wouldn’t base it on a percentage of what I made. If I pay myself 20% then what? Pay myself $20k or $200k in these scenarios?

Again, I think you are asking the wrong question. You aren’t really talking about “paying” yourself. You are talking about how much to reinvest.

When I made $250k a year, I took a $50k salary. However the rest of the $200k also comes to me as a pass through. So I’m still getting the money. I saved $100k on it. The rest is working capital.

So how much did I “pay myself” in this scenario? $50k or $150k?

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[JustinY]

Highly recommend reading "Simple Numbers, Straight Talk, Big Profits". Absolute eye-opener for me.

Here's a good summary of the most important points in the book: “The Four Keys” from Greg Crabtree’s “Simple Numbers, Straight Talk, Big Profits!”

That's the book that changed everything for me, and reading it turned my business around overnight.

Just bought the book on Amazon. I think it'll be similar to Profit First, but more perspective is always welcome.

 

[amp0193]

Just bought the book on Amazon. I think it'll be similar to Profit First, but more perspective is always welcome.

Profit first is a cash management system, that aims to make sure you as the business owner are getting paid.

Simple Numbers is about understanding the fundamental numbers of your business, with one of the points being, that if you aren't able to pay yourself a full salary, and show a profit, that you're business is on a lifeline.


The end goal of being in control of your business finances applies to both, but that's about where the similarity ends.

 

Dislike ads? Remove them and support the forum: Subscribe to Fastlane Insiders.

[yyes]

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.