Compensation for small business owners: How much should you pay yourself?

If you’re an owner of a business you might be confused about when and how much to pay yourself.

Even though it’s an important part of small business administration, many small business owners are confused when it comes to determining the amount that they should pay themselves.

This blog post will be your basic guide to determine just how much you should pay yourself,, when is the ideal time to pay yourself, and what is the best way to pay yourself.

How much should you be paying yourself?

The following should be considered. Take a squiz.

#1 Your ideal budget

Take into account all your personal expenses and come up with an estimated number.

This will be your ideal personal budget and it will also serve as an overview of all your personal expenses so you can easily determine how much you need to pay yourself to meet these costs.

#2 Calculate any taxes you may have to pay to IRD

This is straightforward. Small business owners in NZ are taxed on their profit and their personal income. Calculate your monthly income taxes, GST, and ACC levies to get an idea of tax deductions.

Also be mindful of whether you’re eligible for a tax break due to any reason.

#3 Pay attention to cash flow forecasts

Make sure that you have a cash flow forecast. This will help you get an overview of your small business budget.

Your accountant can help you with this. If you don’t have an in-house accountant, you can outsource your accounting functions to cut down costs and gain access to seasoned professional expertise at the same time.

Our Ebook highlights this and many other reasons why you can’t afford not to outsource. Drop your email in the chat and we’ll send it to you for FREE.

#4 Consider your worth

How much of a salary would your skills and experience earn you, if you had been in the job market?

Research on industry-average compensation packages for your level of expertise and consider this amount when setting your monthly income as a small business owner.

#5 Consider your current profit

Regardless of your ideal budget you can’t pay yourself anything that is higher than your profit. Compare your profit with your ideal budget and try to compromise by cutting off redundant expenses.

When should you pay yourself?

If you’re a new business or your business is struggling, it’s ideal to pay yourself last after taking care of all other expenses and your employees’ salaries.

However there are benefits to paying yourself first too. Rather than paying yourself what is left at the end of a month, you pay yourself a full income that you can use for savings. This increases your financial security and your ability to invest more.

So once your business is established and is making stable profits, paying yourself first is recommended.

What is the best way to pay yourself?

Drawings – This method consists of taking money out of your business profit for personal spending, as and when you need to.

Tax is not deducted from drawings so make sure you put aside money for business income taxes, if you’re using this method to pay yourself.

Pay yourself a salary – If you own a company you can pay yourself through the payroll system and deduct your PAYE tax through that.

Note that sole traders aren’t eligible for this employment tax liability, as they can’t be their own employees.

But don’t worry. With the help of a virtual tax accountant you can rest assured that your taxes are taken care of.

We can sort out your finances for you – Professional accounting services starting at $60 per month.

There are a few things to get sorted before you decide on how much you should pay yourself. Clearing out your cash flow, preparing a cash flow forecast, getting your taxes in order, and researching your worth in the job market are a few of them.

Getting the help of a qualified small business advisor and accountant will be invaluable to you in this process. Our chartered accountants are here to help with professional and seasoned guidance.

Drop us a kia ora in the chat and we’ll take it from there.

Talk to us about how we can support you and your business.

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