2. It separates your business and personal finances
One of the golden rules of entrepreneurship is to separate your business and personal finances. But when you’re consistently relying on your business accounts to manage personal expenses, the line between the two starts to diminish. By paying yourself, you can further define business and personal spending and move to a more permanent line between the two.
This is also very important when you’re looking for business funding. Lenders – including QuickBooks Capital – like to see that you can responsibly manage your business’ finances. So it’s best to keep the lines between your personal and business finances clearly defined.
3. It helps you recognize your worth
Why should you pay yourself? Well, because you deserve it. Sure, there are logistical reasons why paying yourself is important, but paying yourself can help you recognize your worth.
At the end of the day, you’re putting in a lot of hard work, sweat, and maybe even a few tears, and you deserve to see the financial fruits of your labor. Paying yourself can put a dollar amount on your hard work and give you the incentive to keep going.
How much should you pay yourself?
Now that we’ve covered why you should pay yourself, it’s time to determine how much. Unfortunately, no hard and fast rule will help you answer that question. Here are a few things to consider when figuring out what’s right for you and your business.
1. What can you afford?
Paying yourself is important, but so is keeping your business afloat. You never want to pay yourself so much that you can’t manage your business expenses. Look at your finances, or work with your accountant, to determine what makes sense for your business.
Remember that there’s a difference between revenue and profits. You’ll want to base your compensation on profits, which is what remains after you’ve deducted expenses from revenue.1
If your business is still new or if your cash flow hasn’t stabilized, you may want to consider paying yourself a percentage of profits.2 This can help you establish a regular pay schedule while allowing for flexibility until profits become more predictable.
2. How much do you need to survive?
Running a business can be stressful, but so is trying to maintain your personal finances without adequate pay. If your goal is to consistently reinvest profits into your business, or if you’re occasionally operating in the red, your starting pay rate may simply be one that covers your immediate expenses, like keeping food on the table and a roof over your head.
3. What’s the legal structure of your business?
Are you the sole proprietor and therefore the only one you need to consult before you sign off on your paycheck? Or, do you operate as a partnership or along with shareholders who also need to be paid and hold some authority over business expenses?
Before you finalize your payment arrangements, make sure to consider the implications of your business structure. This includes understanding the relationship between your business structure and any tax regulations.3 As such, it’s a good idea to consult your accountant and/or the IRS website for additional information about business structures and tax responsibilities.
4. What do you deserve?
How much would you earn doing a similar job somewhere else? Evaluate pay rates as they relate your responsibilities and tasks, business location, and experience level.4 There are many websites, like Glassdoor and PayScale that make this part of the equation much easier.
Completing this step will give you a good starting point. It also allows you to define “reasonable compensation,” which is important when dealing with taxation and the IRS.5
Putting yourself on a regular pay schedule will make it easier to create a strong division between your personal and business expenses and help regulate your cash flow. It will also allow you to reap the financial benefits of all your hard work.