I always find it interesting when I ask other business owners how they pay themselves?  Do they W-2 themselves like their employees?  Do they draw on the business checking account when they need money?  Do they look at their bank account balance and take a certain percentage?

A lot of the time I find that most owners don’t really have a formula they use for paying themselves?   When I started my business I wasn’t sure what to pay myself.  Was it a little bit less than gross revenue? Was it half of gross revenue?  As I studied my PNL and worked out the percentages in my business it came pretty clear how to pay myself regularly and estimate what will be left over in the business at the end of the year.

This is where knowing your numbers is very important.  Every business is different.  However you must need a system that works for you so you can pay yourself accordingly.  I generally recommend an owners W-2’s themselves 10% to 12% of the gross revenue of the business (NOTE THIS IS FOR A SERVICE BUSINESS).  If the business is doing $500,000 in gross revenue then the owner would generally pay themselves $60,000 a year in W-2 income.  Depending on the business a 5 to 15% net profit is the goal.   However, you must be careful because you have to keep money in the business to reinvest.  Debt service is paid after net income.    If the owner draws all the net profit out of the business there will be nothing left to reinvest back into the business or pay the debt load.  You will also be required to pay taxes on your net income.

Below is a very basic PNL statement for demonstration purposes.  You can see that after all expenses (including the owners salary), debt service, and taxes is paid there is approximately $52,000 in net cash at the end of the year.  This cash plus the owners salary is $112,000 or 22.40% of the gross revenue of the business.