Setting Your Salary as a Business Owner | 6 Steps

Setting Your Salary as a Business Owner 6 Proven Steps

In Australia, where entrepreneurship is thriving, understanding how to determine a fair and sustainable salary is essential. This guide will take you through a comprehensive six-step process to help you in setting your salary a business owner.

Setting your salary as a business owner is a crucial aspect of managing your finances and ensuring the sustainability of your business.

Being the boss means you get to make all the big decisions about your business – including how much to pay yourself in wages, salary or drawings.

As the owner, you might need to underpay yourself in the early stages of building your business, so you can reinvest the profits. But your time is valuable – and you need enough money to pay the bills. So how can you find the right level of pay? It has to be enough to keep the mortgage paid, while also building a thriving business.

Free business owner salary calculator

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This is a valuable tool that empowers business owners to navigate the intricacies of determining their compensation. This user-friendly calculator provides a holistic approach to setting your salary as a business owner, taking into account factors such as business finances, industry benchmarks, and personal needs. By leveraging this tool, business owners can gain clarity on the optimal salary range that aligns with their financial goals and ensures the sustained growth of their ventures. The calculator serves as a practical resource, aiding entrepreneurs in making informed decisions about their compensation, ultimately contributing to the financial success and stability of their businesses. Give this salary calculator a try!

How much should you pay yourself as a business owner?

If you’re trying to decide on what approach you to implement in setting your salary as a business owner, here are a few questions to ask yourself:

- What can the business afford? - You need to leave enough cash in the business to keep it ticking along, pay your basic costs, and meet your tax obligations. Once you’ve considered all those outgoings, how much does that leave you as a potential salary? We can help you work out what that number is, so you can establish a sustainable rate of pay.

- What’s the market rate for your role? - What would you have to pay someone to do the work you’re undertaking in this business? Maybe you wouldn’t actually be able to find anyone to work the same long hours, but if you were hiring someone with your experience, to do the same sort of work for 40 hours a week, what would they expect to be paid? That number is a good starting point for thinking about your own salary or drawings. If you’re being underpaid, it’s time to think about ways to grow your profits. If you’re being overpaid, congratulations on building a highly profitable business!

- Could reinvesting profits grow your income faster? - You can take all the profits out of your business, which should give you a strong and sustainable income. Or, could you reinvest your profits and grow the business faster, leading to a higher income in the long-term? You might choose to spend some of your profits on advertising, a better website, or developing a new offering, for example. Or you could pay for assistance in some area of the business. If the investment leads to higher growth, it might be well worthwhile.

Step 1: Determine your monthly net income

Understanding your net income serves as the cornerstone for determining your owner pay.

Proficiently calculating net income is crucial to ensuring your business covers its expenses efficiently. Blindly withdrawing funds from your business without strategic expense planning can quickly steer you towards Debtsville.

Net income represents what remains after deducting all business expenses from your gross revenue, which encompasses all inflows into your business—essentially, it's your profit.

You don't require an elaborate calculator for this task; the net income formula is straightforward:

Gross revenue minus expenses equals net income.

To ascertain your monthly net income, generate a Profit & Loss report for a monthly period through your bookkeeping program. Utilizing the average net income from the past six months adds a layer of security, accounting for both quarterly and unforeseen expenses in your financial planning.

Step 2: Compute the savings on your taxes

The subsequent step involves determining the amount you should allocate for taxes.

Let's be real — setting aside sufficient funds for taxes poses one of the most significant challenges for small business owners. Why? Because the common approach involves contemplating tax savings only after personal compensation, loan repayments, and investments in that sleek new office chair have been addressed.

Here's the deal — if your business turns a profit, taxes are inevitable. Allocating funds for taxes is a non-negotiable aspect of your business finances, making it the second crucial step in this process.

How much should you earmark for taxes?

A prudent starting point is 30 percent of your net income. For instance, if your net income amounts to $100,000, it's advisable to set aside $30,000 for taxes.

In cases where you find yourself in a higher tax bracket or filing jointly with a high-income individual, your tax savings percentage may need to be adjusted accordingly.

If you engage the services of an accountant or tax preparer, seek their advice on the percentage of net income to reserve for your tax obligations. With insight into your typical personal income, they can provide a more precise percentage to consider when filing your income tax return or making quarterly estimated tax payments. However, if you're just starting your business, commencing with that 30 percent is a reasonable baseline. This figure accounts for self-employment taxes, including Medicare and Social Security taxes.

When calculating owner pay, deduct your monthly tax savings from your net income. This resultant figure represents what you, as the business owner, can access on a personal level — or, in simpler terms, your owner access number:

Net Income * 30% = Monthly Tax Savings

Net Income - Monthly Tax Savings = Owner Access

Step 3: Take into account your business debt

Now comes the moment to reward yourself, right? Not quite! Before enjoying the fruits of your labor, it's time to address your business debt. (Trust me, you'll appreciate this later.)

For this phase, commence by identifying the total amount of your monthly minimum debt payments. If you've taken out loans, your lender likely stipulates a minimum monthly payment. Sum up these minimum monthly payments for each loan or credit card. It's important to note that, later in the process, you can augment these payments if there's surplus money after compensating yourself.

Also, bear in mind that the interest on your loans is tax-deductible.

Now, deduct your monthly minimum debt payments from the owner access number obtained in step two:

Owner Access (from step two) – Monthly Debt Payments = Owner Access

Step 4: Develop a savings plan for your business

Are you gearing up for significant investments in your business in the coming years? Contemplating the creation of a business emergency fund or aiming to establish a robust cushion in your checking account? Before allocating funds for your personal income from your business earnings, it's crucial to assess the savings you wish to accumulate within your business, distinct from your personal accounts.

Businesses typically set aside funds for various purposes, including:

- New hires
- Equipment purchases
- Product development
- Product launches
- Checking account cushion
- Rebrands or website redesigns
- Training programs or certifications
- Emergency funds (which are three to six months of expenses)

When strategizing your business savings, follow these steps:

1. Review the list above and identify your priorities. What are you saving for? Create a list similar to the one provided.

2. Answer two key questions for each item on your list: How much do you want to save, and over how many months?

3. Prioritize your list. Determine which savings goals are non-negotiable and which ones you can defer.

Based on your list, select a few top priorities and calculate your monthly savings amount for each item:

Monthly Savings Amount = Savings Goal / Number of Months

Sum up your monthly savings amounts to obtain your total monthly savings.

Subtract your total monthly savings from the owner access number derived in step three. This results in your final owner access number:

Owner Access (from step three) – Total Monthly Savings = Final Owner Access

Step 5: Be honest about your personal needs

You've determined your owner access number, but now let's assess whether it aligns with your actual personal needs. Set aside the owner access number for a moment and critically evaluate your individual financial requirements. How much cash flow is essential from your startup business to cover your cost of living? This answer varies for everyone, depending on factors such as whether you're the primary financial provider in your family or if there are additional sources of income in your life.

For a comprehensive analysis of your personal finances, consider the following:

- Fixed Expenses: These are necessary living costs that remain constant each month, such as rent or mortgage. Recognize that fixed expenses can vary based on your location; for instance, living in Sydney incurs higher fixed expenses compared to living in Melbourne, where the cost of living may be more affordable.

- Variable Expenses: These are necessary living costs that fluctuate monthly, such as groceries.

- Extra Expenses: These encompass both fixed and variable expenses that aren't essential for your basic needs, such as cable TV or dining out.

Evaluate which of these personal expenses your business needs to cover and identify areas where you can make adjustments while your business gains momentum. Consider the geographical context, as costs of living can significantly differ. Use these insights to determine your monthly personal need number, ensuring your business aligns with your individual financial requirements.

Step 6: Refine the figures

In an ideal scenario, your personal need number would be less than your owner access number obtained in step five. If that's the case, congratulations – it's time to reward yourself and pay your bad self!

However, more often than not, your personal need number might surpass your owner access number. This is where the art of finessing the numbers comes into play.

Before making adjustments, clarify your priorities both in your personal life and business. Consider the following categories and determine which aspects you are willing to modify:

1. Business Expenses
2. Debt Payments
3. Business Savings
4. Personal Need Expenses

Notice that tax savings aren't in the mix because they remain non-negotiable with the Australian Tax Office (ATO).

Initiate the refinement process by starting with the least significant numbers to you. For instance, if saving for an office remodel holds greater importance than dining out, consider reducing your personal need number and extra expenses. Similarly, if allocating funds for a special event for your child takes precedence over saving for a work laptop, consider trimming your business savings.

The ultimate goal is to align your owner access number with or surpass your personal need number.

Essentially, you want the accessible amount of money, either through an owner's draw or an average small business owner salary to exceed your financial requirements.

Prepare for tough decisions and be open to making adjustments across various areas. Remember, the aim is to establish a sustainable business owner salary that is realistic for your lifestyle and company, not an impractical fantasy.

If your owner access number exceeds your personal need number, strategically reallocate the surplus.

- Will it contribute to building your financial cushion in your checking account?
- Will it be allocated to increased savings, debt repayment, or serve as additional owner pay?

Having clear priorities in mind will facilitate informed decisions regarding the surplus.

We'll help you in setting your salary as a business owner

We can help you figure out how much your business can afford to pay you, analyse the potential gains of a business investment, or weigh up the pros and cons of hiring someone to help you.

Get in touch, we’d love to hear from you on how we can be of service in setting your salary as a business owner!

Acro Accounting & Financial Planning (AAFP) offers a one stop solution right from accounting, taxation, financial planning to other business advisory services. As Certified Practicing Accountants (CPA’s) and professional tax advisors, we pride ourselves on being experts with the latest developments relating to business and taxation. We as professional public practice firm, provide high quality taxation and business advice to our clients through a personalised service at competitive rates.

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