Miquel Henderson had the same problem as many other business owners. Before implementing Profit First, Miquel would look at her outgoing expenses and either think that the amount of money left was either great, or in most cases, not so great. She would simply look at her numbers each month and then do her best to make the numbers work the best way she could.
The issue was, since there was hardly ever any money in her accounts, she didn’t always have the money to pay her expenses. Miquel also didn’t know how to use the extra money she did have on occasion.
KMMP allowed Miquel to look at her numbers in a different way than she ever had before. She was given the reinforcement that looking at things in a different way was okay. KMMP also encouraged Miquel to look at different account options, including a DRIP account. While many people are not ready for those extra accounts right away, KMMP allows business owners like Miquel to keep those accounts in the back of their mind.
While Miquel might not be ready for the extra accounts for another three to six months, she knows they are available to her when it is time to take her business finances to the next level.
Miquel wasn’t sure she was doing the right thing when she started KMMP. However, she learned a lot from the very beginning and is so glad she took a leap of faith. Options like giving her employees a raise had occurred to her in the previous months. However, she didn’t think about profit distributions for her staff until she learned about it through KMMP. She is excited to now explore that option in the future.
While Miquel wished she could be on East Coast time, so she didn’t need to meet so early in the morning, she loved every minute in KMMP. She hasn’t implemented everything she has learned yet, but is happy everything was so easy to understand.
The only section Miquel had difficulty understanding was Module 7, but that was due to her not having the information she personally needed to make the necessary allocations. She is aware that there are so many extra accounts she should consider in the future and looks forward to the time when she can sign up for the ones that will work best for her needs.
Miquel is looking forward to the next year of her business, post-KMMP. She has major plans to bring in more profits, so she is ready to open those extra accounts and continue to take her business to the next level.
Miquel can’t wait to keep connecting with Shannon, and the rest of the team at Fit for Profit, so she can keep implementing everything she has learned with KMMP.
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The two major ways entrepreneurs can take money from their business is through draws or by receiving a paycheck. The type of entity in which their business is set up will determine which method can be used. In either case, entrepreneurs need to be careful not to shortchange themselves.
For small businesses formed as an S Corporation and with plenty of profits, reasonable compensation is a term you may want to be familiar with.
Many small businesses have organized as an S Corporation form of entity. In many cases, the S Corp election allows a business owner to save money on self-employment taxes, especially if they are operating as a sole proprietor. S Corp profits, or distributions, are not subject to payroll taxes.
If you are a business owner taking a salary and contributing substantially to the operations of the business, you may think that you should just take the distributions and forget the salary. After all, think about how much you would save in payroll taxes. But this has already been tried and shot down by the IRS in the courts. And this is where the term reasonable compensation comes in.
The IRS requires that business owners who perform a substantial contribution to the business be paid a salary according to a number of factors. This is called reasonable compensation. You can’t pay yourself below the market and take a large amount in distributions.
The IRS has issued a fact sheet that describes the guidelines that can be used to determine reasonable compensation. They include employee training, experience, duties, time spent, history of distributions, bonuses, and many other factors.
There are also reasonable compensation ramifications for C Corporations as well.
If you’re running a service business, it’s easy to initially think you can do well with a similar hourly rate that you earned as an employee. However, think of the amount of time and energy you are putting into your business every day of the week.
Here’s a quick list of five elements that should be included in the salary of every entrepreneur:
If you were doing the same work for a company that hired you, what would your payment be? Are you making at least the market equivalent or better? A lot of times, as entrepreneurs, we tend to focus only on this piece of our salary when we set our pricing, and that’s a big mistake. It’s only 75 percent of what our total pay needs to be.
As an entrepreneur, you take extra risks when you own your own company, and you should be compensated accordingly. Your capital is tied up in your business and should be earning a good return in addition to your reasonable salary.
Employees get vacations, health insurance, and bonuses; and you should too. This should be part of your salary package as an entrepreneur.
Although our individual taxes are not deductible as business expenses, we need to compensate for them so that we’ll have enough cash for our living expenses. It’s a huge chunk too. We work about three and a half months every year, just to pay for our taxes.
When you work for yourself, no one is going to fund your retirement for you. Although the Social Security program helps a lot of seniors, it’s up to you to set additional money aside for a comfortable future. The only way you can do this is to make sure you have given yourself a good salary.
Your salary should include all of these components. If it doesn’t and you feel like you can’t afford to pay yourself that much, then your pricing might not be reflecting all of these items correctly, you might have a volume problem, or your business model may need some adjusting.
It’s normal to take a smaller paycheck the first few years as we’re building our businesses, but if you’re still doing it after several years or constantly having cash flow issues, then something may be wrong.
I would be more than happy to chat with you about your salary, to see what changes need to be made to ensure you are getting the salary you deserve.
Want to learn tips and tricks live with Shannon? Join the Facebook Group where she goes live every Wednesday at 8 pm EST to talk about these topics.
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Shannon Simmons, a 10+ year business owner, and 5+ year Profit First Coach is the owner of Netbooks Accounting Services, LLC. She is one of the original Profit First Professionals when the concept was created by Mike Michalowicz.
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