Pay Yourself When You Pay Your Employees

Business owners pay their employees regularly, but many don’t pay themselves at the same time,  and this is a serious mistake that can lead to failure to achieve key personal financial goals. One major reason to own a business is to make more money for yourself than you could by working for somebody else, yet many people put themselves at the bottom of the list, get paid after everybody else and end up making less, not more. 

At its core, not putting paying yourself in the same category as your employees when it comes to being paid for your services betrays an underlying attitude towards your business that is likely to get in the way of your success. What it says is that you view your return as what’s left after everything else. You are bundling together two very different concepts, and are making no distinction between what you make for your role as an employee working in the business and your return as an owner.  

The reason this generally starts to happen is because the business isn’t making enough money. That is quite understandable at first, but I have seen people who have spent years not paying themselves properly and they struggle to make the money they deserve. When they do make this change it almost always makes a significant difference to the operations and profitability of the business and is a struggle well worth making.

Viewing yourself as an employee and making sure that you get paid at exactly the same time as all the other people do turns your compensation from a discretionary expense that can be deferred into one that has to be paid.  There are three fundamental reasons to do this:-   

1.As well as improving your personal situation by making it more likely that you will be paid it changes your relationship with the company and how you view your role. 

2.It shifts the focus away from solving problems by taking the financial pain yourself to finding other solutions to solve recurring problems. 

3.Recognizing the true cost of having someone do your job gives you a better measure of the true profitability of the business and helps in making realistic decisions about the cost structure of the business and how it should be managed. 

It follows that the amount that you pay yourself should be the market rate for doing your job and that it should have nothing to do with the return you get as an owner of the company. A good way to approach it is to use the number that you think you would have to pay somebody else to do your job. If you bring in business, then you can include commission as long as it is performance and not ownership related.     

Don’t be too worried about getting this compensation number exactly right – as with so many things, it will give you great information even if you are ten percent out. Once you have it, the best thing to do is to put yourself on the payroll so that your compensation for your role as an employee becomes an automatic part of your core expenses, and not a discretionary item that can be deferred when the cash is tight. 

Many people have an aversion to putting themselves on the payroll because of incurring payroll taxes, but what I am talking about here has nothing to do with what taxes you pay or how you report to the Government. How you report to yourself has nothing to do with how you file your taxes, and it is perfectly acceptable to have different treatments on your management accounts and your tax return.

The way you book your compensation is between you and your accountant and has nothing to do with this concept. I have covered this in my article “Is the IRS Getting in the Way of How You Run Your Business” and if you think about it, saying that you have to look at your numbers the way you have to file them is tantamount to saying that you are running your business for the IRS and not for yourself. 

Paying yourself when you pay your employees is about running the business professionally rather than as an extension of your personal finances; it is about doing something to break out of self-limiting beliefs. 

What you must do is take the cash regularly and put a number on your internal P&L that reflects what it would cost for somebody else to be hired to do your job. You just need to decide to make the culture change and figure out the details to allow you to do so.