Are you paying yourself enough? Business owners should make at least THIS much...

Too many small business owners are undervaluing the work they put into their business and are underpaying themselves. The truth is that this hurts the business AND the owner. By underpaying the owner, the business model might not be properly factoring in the cost of managing the business! Don't be that owner! Pay yourself AT LEAST this amount (we talk about it in the video).
Some of you might be concerned that you aren't there yet. Don't worry! Start with a new shift in your mindset and set a goal to start paying yourself this new rate. Make a reasonable plan to do so! If you need help planning for your goals, we've got the Profit Planning workshop that goes over this: learn.claracfo...
Since all businesses are different, you may not know what makes sense to pay yourself! How much SHOULD you make as an entrepreneur? The upper-limit is limitless, but the minimum pay is what we talk about in this video.
Let's discuss below... leave me a comment!
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Hannah Smolinski is a #CPA and the Founder of Clara CFO Group. Find out more about Clara CFO Group at claracfo.com/
Disclaimer: This video is intended for educational purposes and
should not be taken as legal or tax advice. You should consult with your financial professionals about your unique financial situation before acting on anything discussed in these videos. Clara CFO Group, LLC is providing educational content to help small business owners become more aware of certain issues and topics, but we cannot give blanket advice to a broad audience.

[@loganwatson2449]

I think this is good advice for owner-operator type small businesses. In my business I pay myself a W2 salary and may also take owner distributions when profits are up. What's nice is i'm paying taxes all year round via payroll tax which reduces my tax liability for the business later on. It also provides a sense of consistency which is important when raising a family.

[@AllWhoWander66]

Hi Hannah, your channel was just recommended to me and I just subscribed after watching this video. After spending 30yrs in corporate banking, I started my own business financial coaching practice 4yrs ago. This is a great topic. In addition to a $100K threshold, I also advocate a net profit margin as a percentage of revenue (10%-30% range, depending on various factors), but your point is well taken...$100K is baseline. Most entrepreneurs could make more than this working for someone else, so why settle for less in your own biz.

[@ClaraCFO]

You'll appreciate today's video! Congrats on making the jump into your own thing!

[@clays1507]

I totally agree with this with my business in year 18. I also believe in properly compensating my talented staff

[@ClaraCFO]

absolutely! we are on the same page!

[@rodneypaglialong1038]

Thank you for posting this Hanna! This has been the goal for this year, definitely! I have underpaid myself for too long in my painting contracting business.

[@ClaraCFO]

You've got this Rodney! 🙌

[@JMichaelsDecorating]

Thank you Rodney for forwarding the video!

[@ClaraCFO]

Thanks for watching and commenting!

[@JMichaelsDecorating]

Thank you for the video! I have never considered what it would cost to replace myself. Hmmm.

[@ClaraCFO]

You aren't the only one! It's a common occurrence for business owners to almost forget about their labor cost. I'm so glad this is helpful 😊

[@alishamcfarland]

Thank you for this video Hannah - you are always the voice the reason that I need to hear to make positive changes to my business and my life.

[@ClaraCFO]

Alisha - you made my day! Love that I can support and encourage you in your business!

[@Thatgeekishfamily]

That's based on a product-based business. Or if the business has progressed that it's making enough that you can pay yourself 100K. Folks starting out, or digital businesses (ads-based), may not be making enough to have that, yet. What about a percentage based idea - for those who continue to pay themselves too little % for what they are making before they get to a place where 100K is even realistic.

[@ClaraCFO]

I'd say this is for all businesses where it's full time and established. It does take time to work up to this level. The main point is to not undervalue your important services of leadership and management!

[@RAPTORFANATIC]

Curious how you feel about equity firms who acquire businesses and pull out $$ in the way of monthly management fees + yearly distribution payments.

[@ClaraCFO]

Since I don't work with many businesses who are working with equity firms, I don't have much opinion on it. I think it would be unwise for managers to come in and take huge paychecks/distributions out of the company coffers. That would seem counter-productive, right?

[@RAPTORFANATIC]

@@ClaraCFO yes I agree 100%!! I have worked as a fractional controller - as well as doing CFO for hire work and have noticed many companies in the 5 - 20 million revenue range being acquired by equity firms. The monthly fees and yearly distribution amounts are excessive in many cases. So detrimental to these small businesses who sell the majority of their shares. Glad you haven’t encountered many client work with that sort of set up!! It makes for a lot of forecasting and strategic planning on my end for a small business to be profitable enough to cover the fees below the NOI line!!

[@benzle93]

Hey Hanna, this is a unrelated question, but I'm wondering about labor costs. What percentage do you recommend adding to your base labor cost (assuming no healthcare or paid vacations) in order to reach true labor cost?...20%, 30%, more?

[@ClaraCFO]

Hi Ben, for employment taxes, you usually at 10%. Benefits can be closer to 20% of wages. If you are asking what you need to be targeting for revenue compared to labor, my go-to is 2-2.5x inclusive labor costs. This is nuanced though and can depend on the industry. What industry are you in?

[@benzle93]

@@ClaraCFO Thanks! I've never been super confident about those figures. I usually add 12% payroll taxes & 8% for workers comp & liability. So, around 20% but 30% might be better. I own a janitorial business. We provide custodians for schools, manufacturing facilities, etc. We have a little over 100 employees.

[@kalebhgoodwin]

I disagree, pay yourself the bare minimum to lower your taxes. And take maximum fringe benefits/ or have the business pay for personal expenses that are legal.

[@jdanois2655]

Hello Kaleb, you may disagree. However, doing it the way you say is why so many people start getting in trouble with the IRS for not paying themselves enough and, in turn, not paying enough in SE taxes. The IRS is vague on how much is enough to pay yourself. However, some resources can be used to determine how much you should be paying yourself. For example, you have the Dept of Labor and Statistics to see how much people in your type of work get paid. Once again, you may get away with it for a while or never get caught, but you don't want to get seen years later and have the IRS disallow your method of paying yourself and then owe back years in SE taxes; and don't forget fees and interest. So the moral of the story is to beware of what you are doing.

[@ClaraCFO]

I generally like to stay away from getting in trouble with the IRS, so I also advise clients to be paying themselves a reasonable compensation as an S-Corp owner and keep business and personal separate as much as possible.

[@anonanon8974]

Are you talking about a single-member LLC? I thought you were taxed on everything you made, whether the money stays in your business account or not. Also, one of the main reasons why people get an LLC is to protect themselves against lawsuits. I was actually searching for videos that warned against paying yourself TOO much because I’m sure a bone-dry account next to a couple of fat personal checking accounts would not go over well in court. Curious if you have thoughts on these Clara.

[@clays1507]

🇺🇸HannahCFO2024🇺🇸

[@ClaraCFO]

:)

[@brianmcclemens2802]

Truth2024