Have you quite your job during the Great Resignation, started off your business and have been wondering if you can take a salary out of the business or not?
Or have you been operating for an extended period of time but haven’t been able to pay yourself?
Numbers should be your greatest friend when it comes to answering these questions.
While there are no set rules when it comes to paying yourself, it is all about balancing the personal and business needs.
I would like to break this process down for you into 3 steps:
Step 1: Identify your personal needs
You require a baseline to start the process. That baseline is how much money you actually need to personally sustain yourself. This can include your rent or mortgage payments and all your other expenses.
I suggest to have three possible projections
- Bare minimum
- Have a bit of a breathing room
- Have a little fun
Step 2: Crunch the numbers
Put together one to three years of financial projections. That includes the income statement and cash flow.
If you have your financial projections done previously, factor in the amounts you would like to take as your salary.
Analyze the numbers and see if this extra expense will create a loss or a bigger loss for your business. While it’s natural for a new business to report minor losses during the start-up years as it struggles for profitability, major losses (such as $50,000) may be too much for your small company to absorb.
Now move on to the cash flow. Ideally, your cash flow will have a surplus large enough to pay your desired salary every month, comfortably cover operating expenses (e.g. loan payments, office rent, employee wages, telephone service, office supplies, and advertising) and leave a little margin for error.
Now that you have confidence in the numbers, it is time to move on to step 3.
Step 3: Decide to take a salary or dividend
There are couple of things to consider when deciding between taking out money as salary or dividend; including but not limited to your company structure ( sole proprietor vs corporation), your personal tax matters and the government reporting obligations.
Salary is an expense to your business and hence, it will lower your profit and the potential corporate tax obligations. Also, you will have other obligations to fulfill such as payroll taxes.
On the other hand, dividends are taken out from profits. So, please consider consulting with a tax advisor when deciding between the two.
At Crunch TimeZ, we support you with putting the financial projections together, to better quantify your business decisions and foresee the future.
We look forward to working with you,
To your success,
