How to Set Your Self-Employment Salary
One of the reasons many people choose self-employment is because they want a better quality of life. This may include more flexibility in when they work, more control over what they do for work, and more enjoyment in life in general.
Whatever the reasons, one of the main ingredients to attaining quality of life is getting paid. As simple as this sounds, this is a topic that many self-employed individuals fail to productively address.
Giving yourself a salary…
- Validates the value that you are offering others through your work
- Ensures that you cover your personal expenses
- Provides incentive for earning more for fun
- Creates more accurate financial records
How much is enough?
While few will debate the benefits of getting paid, how much pay is enough? This is where you’ll want to apply a little business science. The goal is to support the desired quality of life without breaking the business budget. Here are four steps to consider when setting your salary:
Step 1: Define your income objectives and levels
How much money do you ideal want to bring home and how much do you need to bring home? Just like the story of the Three Little Bears, there is a too small, too big and just right view here. From this perspective, you can then assess the revenue potential of your business operation and tweak things to ensure that you are paid despite fluctuations in sales volumes. Ideally, your salary should be a fixed amount on a routine basis, ensuring that you are paid regularly and reliably. However, you can also set your pay as a commissioned percentage of sales which will result in a more variable income.
Step 2: Consider taxes and benefits
When figuring your desired compensation, be sure to consider that your salary is not the same as your take home income. Taxes, benefits, and other deductions affect how much income you actually take home. Use a Paycheck Calculator to help better understand how tax withholdings and deductions work.
Step 3: Monitor and manage your financial forecast
Regardless of how well you calculate how much money you’d like to be paid, if the company is not generating sufficient sales and profits, you won’t get paid. For this reason, you’ll want to have a solid forecasting tool for projecting, tracking and monitoring revenue levels. It is a simple law of nature that what you track expands. With routine control over how much income your business is making, you’ll have routine control over how much income you are making.
Step 4: Use a payroll service
Although you can manage payroll on your own, outsourcing this task can save you time and reduce the risk of being in non-compliance with payroll rules and regulations. It can also mean more benefits for you. For example, certain benefits can be handled as pre-tax dollars. An experienced payroll service provider can help you to understand your options in these areas and more.
In summary, as long as we live in a currency-based world, the more currency you control the better. It pays to get paid.