Whether you started your business to be your primary source of income or to make more money on the side, it can be difficult to work out how much to pay yourself.
You need to factor in your living expenses, superannuation, sick leave and holiday pay, while setting fair market rates for your product or service.
You also need to consider how the amount you pay yourself now may impact on the long-term profitability of your business.
Here are some things to consider:
Making a plan
Your business financial plan can help you forecast how much you can afford to pay yourself. Include your wage or salary in your business plan and you can start as you mean to go on.
When you’re starting out, you may choose to pay yourself enough to get by so you can redirect more revenue or profit into growing your business. This may help you to grow faster and be worth more over time.
Alternatively, paying yourself a market rate can help you to structure your business in a sustainable way and make sure you have enough to live comfortably, perhaps reducing upfront financial stress.
Making the most of your tax deductions
When you’re a sole trader, your net profit is considered an extension of any existing income and gets taxed at your individual tax rate. At the end of each year you need to produce a profit and loss statement and a personal tax return.
You might be able to claim some business expenses when you prepare your tax return. You can find out more about what you can claim at the Australian Taxation Office (ATO) website, and seek help from your accountant if you’re unsure.
Planning for a rainy day
The success of your business can rely on your personal health and wellbeing, so it’s important to have financial plans in place in case of accidents or emergency. One way to do this is to consider income protection insurance, which can pay you a wage if you’re unable to work, or cover the cost of hiring a replacement, among other things.
While paying yourself superannuation isn’t compulsory, it might be something to consider to help you afford the life you want to have in the future.
Employers, regardless of how big or small the business is, are required by Federal Government law to pay at least 9.5% of all eligible workers’ ordinary time earnings to their super accounts if they earn more than $450 a month (before tax).
Make sure you aren’t missing out and check the ATO website for any government contributions that might be available if you are self-employed.