How to Decide Your Salary When You are Self-employed
Getting your first paycheque as your owner can be an overwhelming experience. As you hold, it would call back to those days when you used to receive your paycheque as an employee. You used to feel secure because you knew when and how much you would get. Now the situation is contrary to what it used to be. Your company is under the aegis of you. While you have to decide salary packages for your employees, you will have to determine your salary package and benefits.
As a business owner, you are likely to use a haphazard approach to decide your monthly income leaving benefits and profits to stash away money for your business operations. It is good that you give priority to your business needs, but this method does not work for all types of businesses, and it will not work in the long run.
The underpaid boss cannot manage to meet all regular expenses, let alone unexpected expenditure. You will end up taking out a guaranteed payday loan with direct lenders. Operating loans can be very challenging when you are not withdrawing enough, and hence you will likely fall in a debt trap. A good rule of thumb says that you should pay yourself neither high nor low. If you are overly paid, your business will struggle to run. If you are underpaid, you will always be running out of money. Here is how you should decide the amount of your monthly income.
Choose the payment method wisely
Salary and draw are two types of payment methods you can choose depending on your business income, overheads, and the kind of company you own. If you are a sole proprietor and have a partnership firm, you will take a draw.
When you use this method, make sure that you decide the amount based on profits on the amount of capital you have invested in. A sudden cash influx can tantalise you to withdraw a large chunk, but draw based on the revenues may put your business at risk. You will likely face difficulty meeting future expenses.
If you are an owner of a corporation, you are entitled to get a salary. This seems to be simpler than the former method because you will get a salary paycheque from your company every month. Remember that you will have to pay income tax quarterly.
Do not leave perquisites
Your compensation does not need to be limited to your monthly paycheque. You can add value to your package by adding dividend you collect quarterly, contribution to your retirement plan, and annual bonus based on the profits made by your company. Do not fight shy of receiving medical benefits and other allowances.
At the time of deciding a package, you should have a clear picture of the financial situation of your company. Whatever the amount you set for your monthly income, make sure that your personal needs do not clash with business needs.
Increase your pay as the business grows
Your salary is not set in stone. As you increase your employees’ wages when your business grows, you can hike in your salary too. When your business is creeping down, you should expect to receive smaller funds. However, do not cut down on the regular pay of your employees. If the cash reservoir is shrinking, you should apply for short-term loans to hit the ground running.
Once your business retakes hold of the market, you can increase the amount of your paycheque. Even though your business is climbing the ladder of success, you should try to take a reasonable salary. Benefits can help you avail tax benefits. Talk to your accountant to decide what will work for you.
Pay yourself enough
If your business can afford you to have withdrawn a significant amount of cash as your salary, go ahead so that you do not need to get worried about your bills. You are running a company, so you would like to provide your family with a comfortable life. When your business faces a recession, you will have to come to a lower salary. You can get back to the track once the dark period is over.
The final word
Deciding a salary as a self-employed is quite challenging. On the one hand, you would like to be paid as much big money as possible, and the other hand you will have to take care of your business needs.raxaul to kathmandu distance
Consult an accountant to decide the right amount of your monthly payments so that neither your business runs out of cash nor you struggle to manage your regular expenses. In the beginning, it might be smaller, but you can increase your pay as profits mount up. So when are you going to pay for yourself? Are you excited about it? In the beginning, it might be tough, but soon you will get an accurate idea of the right amount of your pay.