Ask Me Help Desk - How do I pay myself?

A family member and myself recently started an IT Consulting business. Things are going fine so far and we have been making deposits as we get them. For about 2 months now, we have went without paying ourselves because we wanted to let the business grow some and we have bills to pay too. My question is at what point can we start paying ourselves and how can we determine how much we make?

Thanks

My son makes $45 per hour as an IT consultant and bills his employer this amount for billable hours. What you have to do is take the current market value for an IT consultant and pay yourself for an eight hour day, or how many hours you work. Start a payroll, by a Quicken programme, generate invoices so everything is documented for your tax consultant. You start paying yourself now, as long as you think the company can sustain a payroll for two partners.

Here is a website that may help you

http://www.startacollectiblesbusines...-earnings.html

tick

I'm going to 'ditto' Tickle's good advice, and toss in another 2 cents or so. As Tick suggested, the "when" question should be determined primarily by the biz's cash flow capabilities. You look at your current expenses level, your expectations of what your expenses will look like near-term (taking into account any growth plans and projections), any short-term plans for asset purchases, and so on... and then figure how much partner salary the biz can comfortably support at present, without pinching your ability to meet the bills and monthly obligations. Keep in mind that you've got major flexibility here--there's no rule that says you have to stubbornly adhere to a certain salary level, once you've decided on one. Slow month?--cut (or skip) your salary that month; make it up with a bonus a bit later when you have a blow-out month.

You can ride common sense pretty far on this one. For example, if you've got plans to move the business into new premises in the next X months, and you know the lease terms will likely require a hefty up-front deposit that you need to save up for, then you might want to keep the salaries toward the lower end for a while to facilitate a little cash build-up. You get the drift.

If you happen to be in the U.S. there's another consideration to evaluate: In what form do you pay yourselves? If your biz is considered a partnership, or if you've wrapped it inside an LLC (limited liability company), then any 'salary' for partners or LLC 'members' (owners) would be in the form of draws, meaning that there should be no taxes withheld or paid on the draws... income, employment, or otherwise. The partners handle their income tax obligation separately, via quarterly estimate payments.

If you're set up as a corporation, on the other hand, then your salaries should indeed take shape as ordinary payroll, complete with payroll taxes, withholdings, etc.

Pretty broad-brush stuff, but your accountant can furnish the details. Best of luck on your new venture!

Quote:

Originally Posted by ArcSine

I'm gonna 'ditto' Tickle's good advice, and toss in another 2 cents or so. As Tick suggested, the "when" question should be determined primarily by the biz's cash flow capabilities. You look at your current expenses level, your expectations of what your expenses will look like near-term (taking into account any growth plans and projections), any short-term plans for asset purchases, and so on...and then figure how much partner salary the biz can comfortably support at present, without pinching your ability to meet the bills and monthly obligations. Keep in mind that you've got major flexibility here--there's no rule that says you have to stubbornly adhere to a certain salary level, once you've decided on one. Slow month?--cut (or skip) your salary that month; make it up with a bonus a bit later when you have a blow-out month.

You can ride common sense pretty far on this one. For example, if you've got plans to move the business into new premises in the next X months, and you know the lease terms will likely require a hefty up-front deposit that you need to save up for, then you might wanna keep the salaries toward the lower end for a while to facilitate a little cash build-up. You get the drift.

If you happen to be in the U.S., there's another consideration to evaluate: In what form do you pay yourselves? If your biz is considered a partnership, or if you've wrapped it inside an LLC (limited liability company), then any 'salary' for partners or LLC 'members' (owners) would be in the form of draws, meaning that there should be no taxes withheld or paid on the draws...income, employment, or otherwise. The partners handle their income tax obligation separately, via quarterly estimate payments.

If you're set up as a corporation, on the other hand, then your salaries should indeed take shape as ordinary payroll, complete with payroll taxes, withholdings, etc.

Pretty broad-brush stuff, but your accountant can furnish the details. Best of luck on your new venture!

Good points. When your cash reserves are built up, established and provide you with a steady income you can actually take a salary and a draw. Although the IRS wants there to be a ratio between that salary and the draws that you take.

Good luck on your endeavor.

Strigner