Generally speaking, how much should I pay myself?

[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.

 

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[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.

 

[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.

 

[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?

 

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[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.

 

[amp0193]

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.

You can't kill the golden goose.

Like @theag said, the real payday is on the exit.

 

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[biophase]

View attachment 33667

I wonder what type of business this chart is aimed at. From the text it sounds like this book is talking alot about service businesses or ones with alot of manpower.

And the Tax 15% doesn't make sense to me as a percentage.

For $0-$250k, If profit is 5%, owner's pay is 50%, then overall profit is 55%. Assuming taxes are 35% of total profit. Wouldn't it be 35% of the 55%, equaling 19.25% of the overall 100%? I don't understand this chart.

I just don't see how operating expenses go up by that much going from $1 to $5M as a percentage.

If I'm doing $1M a year, my operating expenses are $650k. At $5M a year, I don't see how they could be $3.25M. I don't need 5x as many people or 5x the space.

 

[JustinY]

I wonder what type of business this chart is aimed at. From the text it sounds like this book is talking alot about service businesses or ones with alot of manpower.

And the Tax 15% doesn't make sense to me as a percentage.

For $0-$250k, If profit is 5%, owner's pay is 50%, then overall profit is 55%. Assuming taxes are 35% of total profit. Wouldn't it be 35% of the 55%, equaling 19.25% of the overall 100%? I don't understand this chart.

I just don't see how operating expenses go up by that much going from $1 to $5M as a percentage.

If I'm doing $1M a year, my operating expenses are $650k. At $5M a year, I don't see how they could be $3.25M. I don't need 5x as many people or 5x the space.

Those numbers were ones that the author said he got after doing bench marking across different businesses. They were general rule-of-thumb numbers. For something more specific to your industry he recommends the following to get a profit %:



Some rule of thumbs for a rainy day fund:


And then owner's pay


And lastly Taxes




In your example where profit really is 55%, then yes you'll probably need to increase your tax percentage. I think most people who read this book, including myself, aren't truly profitable yet. I plan on starting with a 1% profit and working the percentages up quarterly.

The other way to think about it is, if using the general rule of thumb numbers, the amount of money for owner's pay is not where it needs to be, his Instant Assessment can be a tool to understand where the gap is.
For me, if I want to replicate my take home of $125k from my slowlane job, I have a rough idea that I would need to hit Revenue targets of $500,000 for my salad dressing company while keeping expenses under control.

Revenue - $500,000
Materials & Subs - $250,000 (the inventory of salad dressing)
Real Revenue - $250,000
Profit - $12,500 (5%)
Owner's Comp - $125,000 (50%)
Tax - $37,500 (15%)
Op Ex - $75,000 (30%)

Right now for every MOQ order I expect $55,000 Revenue
Materials & Subs is $18,000
So Real Revenue is $37,000
Op Ex is $33,000, but $9,000 is flat (accountant, Amazon/Shopify account fees, email service, etc. ) while Amazon fees are about $12,000.
I end up with $4,000 after everything is done.

The two things I need to do is increase revenue while lowering Op Ex, which for me will mean trying to grow my other distribution channels more than Amazon, so I don't pay as much for FBA fees, repacking, etc.
I am also looking at cash flow velocity, because right now I'm estimating 1 MOQ per 9-10 months vs a target of 1 MOQ every 3 months.

 

[biophase]

For me, if I want to replicate my take home of $125k from my slowlane job, I have a rough idea that I would need to hit Revenue targets of $500,000 for my salad dressing company while keeping expenses under control.

Revenue - $500,000
Materials & Subs - $250,000 (the inventory of salad dressing)
Real Revenue - $250,000
Profit - $12,500 (5%)
Owner's Comp - $125,000 (50%)
Tax - $37,500 (15%)
Op Ex - $75,000 (30%)

Right now for every MOQ order I expect $55,000 Revenue
Materials & Subs is $18,000
So Real Revenue is $37,000
Op Ex is $33,000, but $9,000 is flat (accountant, Amazon/Shopify account fees, email service, etc. ) while Amazon fees are about $12,000.
I end up with $4,000 after everything is done.

The two things I need to do is increase revenue while lowering Op Ex, which for me will mean trying to grow my other distribution channels more than Amazon, so I don't pay as much for FBA fees, repacking, etc.
I am also looking at cash flow velocity, because right now I'm estimating 1 MOQ per 9-10 months vs a target of 1 MOQ every 3 months.

Your real revenue is $500k, not $250k based on the book's definition. If I was looking at your business it would be $500k gross revenue, $250k in COGS, $75k in expenses. Company profit is $175k.

Within that $175k profit, you can pay yourself $0-$175k. Which you'd want to be as low as possible.

That's all there really is to your business. All that other stuff doesn't make much sense to me.

 

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[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.

 

[yyes]

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?

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.

Heres a great article another fast laner shared with me. This is what I was looking for.

“The Four Keys” from Greg Crabtree’s “Simple Numbers, Straight Talk, Big Profits!”

Greg Crabtree lays out what he calls “The Four Keys” in Section 1 of his book, “Simple Numbers, Straight Talk, Big Profits!”. These are the…

medium.com

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

 

[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.

 

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[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.

 

[sparechange]

Ah so much to learn, going to be awesome paying 6 figures in taxes one day...

 

[mikeyjd]

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.

Typically you can hire an independent 3rd party to run a questionnaire and have them set your salary for you based on fair market value for an employee that does your job/jobs.

 

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