Paying yourself a salary

[New Perspective studio]

Heres one i Know the seasoned business owners are going to laugh at but hey we all have to learn. I dont laugh at fat people walking into a gym if you get my drift.

My business is small. It has grown quite a bit in the last few months and I was facing issues with workflow which got me to thinking about employing somebody else and paying them a salary.

Then i realised something i dont even pay myself a salary. I mean I would take a look at the monthly figures and a certain percentage would go to covering costs, another percentage into the marketing budget and so forth and whats left would be mine.

The last few months, it being end of year and all, have been up and down and at times working on my percentage value my marketing budget for example would be too big for my liking, so \I would set some aside for the next month.

As you can see this is a very inconsistent way of working with finances. I have heard many old businessmen say bosses dont get salaries i always assumed that meant they take whats left after everything is paid and then some for growth.

I have no qualifications in finance or even business this much should be apparent.

What is the best option regarding the owner of a business and how much he takes home. Obviously for the budgeting part i think i need to move away from a percentage based budget and try to work on some kind of yearly average right?

[Justloadit]

You should not be a slave to your business, if the business can NOT pay a fixed salary for the work you do, then you have no business. How will you ever get out of being the slave then?
Granted during start up, you forfeit the salary to build capital to get the business of the ground.

As soon as financially possible you must start paying a salary, maybe not what a director earns, but more like a fair salary for an employee to do the respective job. If there is some profit left, then distribute as required.
There are a number of reasons for this,
1. You have a regular income which the payslip can be used for getting personal credit when required, as there will be a history, especially when you need overdrafts or short term loans
2. It forces you as the business owner to monitor the business expenses in order to cover this salary
3. You pay PAYEE monthly which reduces the adjustment for provisional tax payments in August and February
4. If you get sick or want to go on leave, you can employ some one to take over as you already budgeted for this monthly salary, making the decision easier when required.
5. As you grow you will have a good assessment if you can employ some one as you would have already been budgeting monthly, and have a good idea of income
5. Even if the company may not have money to pay the salary in that month, you then make a personal loan to the company to pay the salary, and have a record in the balance sheet. Pay the loan back as soon as possible to clear this. This personal loan is only for short term requirements, not to increase your loan account in the company. If you find you can never pay this loan, then you have to relook at your business model and decide where it is going wrong.

[AmithS]

Hi Justloadit,

For this item are you referring to personal income tax?

3. You pay PAYEE monthly which reduces the adjustment for provisional tax payments in August and February

[Justloadit]

Hi Justloadit,

For this item are you referring to personal income tax?

3. You pay PAYEE monthly which reduces the adjustment for provisional tax payments in August and February

Yes personal income tax - PAYEE - pay as you earn, also reduces the stress of finding the extra cash to cover the provisional tax payment.
Due to the poor financial situation that we are currently experiencing, I have receiveed money back from SARS, as I have fallen into a lower Tax bracket.

I have been doing this for the past 30 years, and has saved my bacon on many occasions, especially when you look at your figures, and realise that there is insufficient bottom line to pay the wages (my staff and mine) because either company expenses too high, or insufficient turn over on the previous month, or outstanding debtors accounts, that it gives you much motivation to overcome the crappy job of calling out your customer not paying, and being a little more aggressive to collect your money. It also has honed in my skills in job costing and correct quoting, and esuring that I have included all expenses in the job costing.

[New Perspective studio]

Thanks guys. I do see the merit in what you are saying especially from a point of being able to gauge where you REALLY stand financially, following tax guidelines and getting some experience should one be looking to hire in the future.
Having said that as of Jan I have a little backlog that allows me to initiate this process , from what I worked out on the years averages its not a great salary but its semi decent. Maybe this will motivate me to grow more.

[primebusiness]

Great summary of the reasons to pay yourself a salary

[Cheery]

Yes personal income tax - PAYEE - pay as you earn, also reduces the stress of finding the extra cash to cover the provisional tax payment.
Due to the poor financial situation that we are currently experiencing, I have receiveed money back from SARS, as I have fallen into a lower Tax bracket.

I have been doing this for the past 30 years, and has saved my bacon on many occasions, especially when you look at your figures, and realise that there is insufficient bottom line to pay the wages (my staff and mine) because either company expenses too high, or insufficient turn over on the previous month, or outstanding debtors accounts, that it gives you much motivation to overcome the crappy job of calling out your customer not paying, and being a little more aggressive to collect your money. It also has honed in my skills in job costing and correct quoting, and esuring that I have included all expenses in the job costing.

Ok, so can pay yourself from the company and then just claim it through personal tax?

[Justloadit]

Ok, so can pay yourself from the company and then just claim it through personal tax?

PAYE is personal tax. Depending on the type of income you have, you may still need to register as a provisional tax payer. You need to speak to your book keeper/auditor for the correct mechanism