How Much Should You Pay Yourself?

After running my landscaping business for the past 12 years, I've picked up a lot of valuable lessons regarding managing my thinking as well as my finances. 

In today's article, I want to talk about how much you, as the owner of a service business, should pay yourself.

Disclaimer: The information I  that I share with you in this blog post is for general informational purposes only and should not be taken as professional advice. I'm telling you what I know as of May 2023, but it's important to remember that laws and rules can change.

I highly suggest talking to a qualified professional, like an accountant or lawyer, if you want advice that is specific to your situation. I make no guarantees or promises of any kind, either directly or indirectly, about how full, accurate, reliable, or appropriate the information I give is. If you use this knowledge as a guide, you do so at your own risk. I'm not responsible for any damage or loss that comes from using this blog post or relying on the information I give.

I'm going to break down what I currently know about this topic because I've asked myself this question more than a few times. So, let's get started.

Setting up your company

Managing your personal financial stability means figuring out your salary. It makes sure that you always have enough money to pay your bills, save for the future, and meet other personal financial responsibilities. By making a reasonable salary, you can make sure that the money your landscaping business brings in meets your own financial needs.

Whether you run your company as a sole proprietorship, an S Corporation, or a single-member LLC, the shape of your business is an important thing to think about.

Since my company is not set up as an LLC, I can't talk about what to do there, please find an attorney or accountant to help. But I do know that if you choose to form an LLC, your taxes will be based on a percentage of your NET PROFIT.

That usually starts at about 22 percent, but the tax rates will go up in line with how much money is made. Then you're also responsible for paying taxes on your personal income. 

Because of this, I've chosen to make my business an S Corporation. An S Corporation is a special kind of business structure that is also called an "S Corp."

It can help you save money on taxes and protect your personal assets, making it a great choice for small and medium-sized businesses. 

I'm the only shareholder in my company, and I'm also the only one who gets paid by the company. Since I'm getting paid as a real employee, I'm on the payroll, and the company takes care of my social security, taxes, and any other costs that come with it.

Okay! Then what should I pay myself?

So, what is a "reasonable salary" in the real world? Even though we don't know for sure how the IRS sees this, here are some of my thoughts on the subject.

 A reasonable salary, in my opinion, is one that gives you enough money to pay for all of your own needs. Sort the costs into those that have to do with your business and those that have to do with your personal life.

Things like a mortgage or rent, food, electricity, internet, health insurance, gas, water, more food, going out to eat, and phone – for example, if you have a work phone and a personal phone, the cost of the work phone is included in the business expenses – these are all things you need to live. You will have to figure out what it means for you.

Here's what you'll do once you figure that out. Let's say that you spend $4,000 on yourself each month. You've decided to give yourself a weekly paycheck of $1,000. Remember, I’m actually ON the payroll in my business.

Now, I have a company like ADP handle my payroll handling. They take care of all the quarterly reports and do pretty much everything else for me.

Beyond the Salary

In addition, you have the option to "pay yourself" with distributions from the corporation. Although I'm not entirely certain of the breakdown of this, generally speaking, I go by the 51/49 rule.

At the end of the year, 51% percent of my overall personal income, which means, let's say that I have 100,000 dollars in my personal account at the end of the year. Payroll, defined as the weekly amount that ADP sends and pays taxes on, has contributed fifty-one percent to that total.

Some of the $100,000, or 49% of the total, could come from distributions from the company. You could give yourself a bonus every three months, or at the end of the year, you could move $20,000 from your business account to your personal account.

You still have to pay taxes on whatever you give to yourself as payment.

Now, if you still have money left over at the end of the year, you can move it to your personal account and pay taxes on it.

Or, you could also spend that $20,000 on things for your business, like new equipment, tools, and other business things, and it would all be considered business costs. These decisions will set you up for a better new year!

Also, and this is very important if you are saving money based on the 30 percent rule (all these percent rules, huh? ), you may already have the money saved to pay those taxes.

Here's a podcast I made about the 30 percent rule, which could totally change your life. It changed mine...  even after I made a horrible mistake.

Wrapping this up... 

Figuring out your salary as a business owner in the service industry is a complicated job that requires you to think carefully about many different things. Bottom line is, how much do you need to live?  Then work like heck to make that happen. 

You can figure out how to meet your own financial needs and keep your business going by finding the right mix and reviewing and changing your salary often as the business changes. In the long term, this will help your service industry business do well and improve your overall financial health.  

Remember that every service industry business is different, so it's important to adapt these suggestions to fit your needs and, if you need to, ask for help from a professional. In the ever-changing world of things, you can set up a salary system that supports both your personal and professional goals with careful thought and smart decisions.  

I love to talk to people about this stuff because when I was first starting out, I was pretty much terrified of not having or not paying enough taxes.  There are so many things to think about as a small business owner - let me help you figure it all out.  

Click this link right now to Learn how to Run Your Business Finances Like a Fortune 500 CEO.