Setting your salary for your business
What is the best way to go about setting your salary for your small business?
I've seen some suggestions to create a set weekly/biweekly amount. That works great unless your business is seasonal or the revenue varies from month to month. Others, like in profit first, say to set a percentage and pay yourself that on a regular basis.
What are the pros and cons to both ways that you all see? What has worked best for your?
Well, I'm a believer in the monthly budget, this month's money goes to next month's bills. So I am handling self-employment the same way - I fund the "Income for next month" category to what I consider my monthly take home. When I get paid, first I set aside 20% for taxes, then I have a few other business related categories and cover any business expenses, and anything left over gets dumped into "income for next month." Then when I get to the next month, anything above my monthly goal gets put into "Income replacement fund" and my goal for that is currently 6 months. This is to cover short months - for example right now August is looking a little tight unless I get some projects in so I may have to dip into that.
I tried PF but always end up going back to profit last. I take care of immediate obligations first, things necessary to keep the business going. Payroll, rent, utilities, etc. As we gain income through the month i allocate it to the categories based on importance. Then reserves, including getting a month ahead, reserve payroll, long term expenses. Finally, salary. I make sure percentages of overhead are appropriate so that profit is consistent as possible, and I have monthly buffers that keep it extremely consistent.
Thank you for the responses. I should probably explain a bit more how I am doing things right now.
I picked a set amount to be my husband's "Salary" each week. Each pay period, I take what ever has come in over the last 2 weeks and divide it in to the following categories, based on percentages recommended in PF:
- Taxes (16%)-paid out quarterly
- Profit (5%)- paid out quarterly
- Salary (50%)
- Operating Expenses (29%)
We are lucky because our operating expenses are very low because of the type of work he does.
My dilemma comes when I go to pay him. Most bi-weekly pay periods, the amount I have set in to that category exceeds the amount we draw as his "salary", so I am starting to build up a somewhat sizable buffer there. I'm also about two months ahead with operating expenses. My question is whether I should continue with the small, regular salary payments or actually withdraw the entire amount I've set aside biweekly.
Does it make sense to keep the smaller payments and let the buffer continue to build? At what point would you take that money out since it's really what he has earned?
Does that make sense to anyone?
I have a pretty good handle on what I need in my personal budget plus adding to long term and emergency, etc. so that is my starting point. But when my income was less certain (looking at you 2020!) and I couldn't meet that I would do 20% until I get to my base. Taxes come into play but I would rather take a hit when I do my taxes instead of dipping into savings... within reason.