How Much Should I Pay Myself Calculator

Understanding How Much You Should Pay Yourself

As a business owner, especially in small to medium-sized enterprises or freelance scenarios, determining a fair and sustainable salary for yourself is crucial. It's not just about taking home money; it's about balancing your personal financial needs with the financial health of your business. This calculator helps you determine a reasonable owner's draw or salary based on your business's revenue, expenses, and your desired profit margin.

The Math Behind the Calculator

The calculator uses a straightforward, yet effective, formula to help you find a good balance:

1. Calculate Total Available Funds for Expenses and Profit: This is your revenue minus your operating expenses.
   Available Funds = Monthly Revenue – Monthly Operating Expenses
2. Determine the Target Profit: Based on your desired profit margin, calculate how much profit the business should retain.
   Target Profit = (Monthly Revenue – Monthly Operating Expenses) * (Desired Profit Margin / 100)
   Alternatively, and often more practically for owner's pay calculations:
   Target Profit = Monthly Revenue * (Desired Profit Margin / 100)
   This second approach ensures the profit margin is calculated against the total revenue, making the owner's draw a portion of the revenue that covers expenses and leaves a set profit. For this calculator, we use the latter for simplicity and clarity in setting a business goal.
3. Calculate Your Potential Salary: The amount you can pay yourself is the remaining funds after deducting the target profit from the total available funds.
   Your Monthly Paycheck = (Monthly Revenue – Monthly Operating Expenses) – Target Profit
   Substituting Target Profit from step 2 (using the second method):
   Your Monthly Paycheck = (Monthly Revenue – Monthly Operating Expenses) – (Monthly Revenue * (Desired Profit Margin / 100))

Example Calculation

Let's say you are a freelance graphic designer:

• Average Monthly Revenue: $10,000
• Average Monthly Operating Expenses: $2,500 (includes software subscriptions, office supplies, internet, etc.)
• Desired Profit Margin: 25%

Step 1: Available Funds = $10,000 (Revenue) – $2,500 (Expenses) = $7,500

Step 2: Target Profit = $10,000 (Revenue) * (25 / 100) = $2,500

Step 3: Your Monthly Paycheck = $7,500 (Available Funds) – $2,500 (Target Profit) = $5,000

In this example, you could aim to pay yourself approximately $5,000 per month. This leaves the business with $2,500 in profit after covering all expenses and your salary.

Why This Approach is Important

• Business Sustainability: Ensures your business remains profitable after you take your salary. This profit is vital for reinvestment, unexpected costs, and growth.
• Personal Financial Planning: Provides a clear, data-driven figure for your personal income, allowing for better budgeting and financial planning.
• Objective Decision Making: Removes emotion from the decision of how much to pay yourself, basing it on financial performance.
• Avoiding Overdrawing: Prevents you from taking too much money out of the business, which could lead to cash flow problems.

Tips for Determining Your Paycheck:

• Be Realistic: Start with conservative estimates for revenue and expenses.
• Track Everything: Accurate tracking of revenue and expenses is paramount for this calculation to be meaningful.
• Consider Your Role: Are you an employee owner (salary) or taking owner's draws? This might affect how you account for it.
• Tax Implications: Remember that your salary or draws will be subject to income tax. Consult with a tax professional.
• Re-evaluate Regularly: Business performance changes. Review and adjust your paycheck amount quarterly or annually.

Using this calculator can provide a strong starting point for determining a sustainable and fair salary for yourself as a business owner.