This is not a guessing game. True, you became an independent designer for the love of the craft. But that doesn’t mean you don’t want a pay day too. Paying yourself little to no money could result in a constant battle to survive. FYI, suffering for your art isn’t fashionable anymore. In addition, you won’t do your best work if you’re constantly fretting about your basic needs. On the other hand, going crazy with the zeros on your cheque puts your business in jeopardy. So, how do you strike the balance?
First things first; Separate your finances
Starting out, the line between your personal and business finances can be blurry. Before you can begin to determine your salary, track your business income and expenses. To make things easier, open a separate banking account for your business. That way you’ll have clear records that will make planning easier and give you less conundrums when it comes to small loans or the taxman.
Can you pay yourself?
If you’re just starting out, money can be a little tight. Business owners will often think of themselves last when it comes to budgeting pay. Their wage tends to be the first thing on the chopping block, right before cutting expenses or letting staff go. Though, this shouldn’t continue once the business starts a health revenue flow. You can start paying yourself a salary when your business is not only in the black, but it has sustained and steady-projected revenue.
Before you feel guilty for having a remuneration, it’s essentially a good thing to do even if you don’t need to. Your employees and investors are convinced of your commitment, because your livelihood depends on the success of the business. It proves that this is more than just a hobby for you. It also helps you in keeping accurate financial records, instead on calculating your burn rate on a falsely deflated number. Plus, it’ll make you more disciplined in the way you dip into the business funds. It’s never a good look if you keep withdrawing – large or small – amounts without a transparent order in place.
Types of Salaries
Before you decide what method will work for you, don’t forget that there are multiple influences to consider. For starters, you’ve always got to look at the tax implications for the option you select. Then of course you have cash flow, legal structure of your business, employee compensation, national payment schedules, deductions, benefits, expenses and growth rate to factor. Best advice would be to consult your accountant/ financial advisor on all the above to come up with a strategy that works for you. They can similarly counsel you in ways to make the most of tax breaks that could go to your salary or re-investment. Once that’s done, there are a few ways you can consider paying yourself:
- Salary method – Pay yourself on a flat rate on a regular schedule. This is subject to withholding for tax, medical and social security/pension
- Owner’s draw method – Salary strictly comes from profits made. This strategy must consider all the company’s expenses, as well as the profit and loss statements, before you can take out of the business’s purse. Unlike the first method, you’re only obligated to pay taxes on this one.
- Reasonable compensation – The taxman set this up for the employers who are just not convinced by the benefits of paying themselves. Basically, you should pay yourself a figure that someone employed in the same role would be receiving. If comparable salary doesn’t work for you, it can be derived from your basic living expenses (keep them modest to incur fewer taxes). Or by taking a percentage of the profits if your business has been making steady profits for some time.
In an interview with Wall Street Journal, Ryan Holmes – the founder and CEO of Hootsuite Media Inc. – said that, “[S]elf-sacrifice is not always necessary and can even become self-defeating. Clear decisions and careful planning come not from depriving yourself and desperately gunning for an exit or IPO, but from working hard and enjoying the ride enough that you stay committed to the task at hand.” This is clearly a practical and emotional decision that you’ll have to make. Fight the instant gratification and FOMO bug, and you should be able to take home what’s kind to you and the future of your business.