How Much Should You Pay Yourself From Your Small Business?

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What price would you put on the gift of life?  Priceless?  Beyond measure?  No way to put that value in dollars?

But we attach a price tag to ourselves every day.  How much do you charge for an hour of your life?  How much for your knowledge, experience, physical and technical skills?  What are you worth?

Let’s work through a little exercise that will help you figure out what you’re worth.  The work you do takes time.  And time is the most precious resource.  Time reflects your life, sands through the hourglass.  When you exchange your time, your life, to go to work, you should be justly compensated.  How much do you need to charge to make this business worth your while?

For the sake of keeping this exercise simple, let’s assume that you are 40 years old and run a one-person heating company:  YOU.  You wear ALL the hats…the exquisite heating systems, running around for parts, general janitorial work around the shop and all the accounting and administrative work.  (Whew.)

Now, follow along and fill in the blanks as you go.

For one year of your life….

1. How much after tax dollars (take home pay) do you need to pay all your bills?  This is the bare bones amount. Feed, clothe and shelter your immediate family. Hmmm.  How about using $35,000 for this number. Of course, your answer will depend on your definition of ‘bare bones’.  There is no right answer! I’ll plug in some numbers so you can follow the math as you read.
2. How much more money would make life much more satisfying? Make it easier to sleep at night?  If you were to pay yourself a bonus for the year, what would it be?  How about another $35,000?  Life would start to get fun with $70,000 take home pay, yes?
3. How much is your knowledge and expertise worth? How many people on this planet know the things that you do?  Significantly less than 1% of the world’s population.  Man, we should be carrying you around on a silver platter!  How about a $20,000 rare-and-useful knowledge bonus?  (Seems like peanuts doesn’t it?)
4. How much money would you like to contribute to worthy causes? You know, if you don’t support the good causes, who will?  This is your responsibility so pony up!  Let’s use a very modest $10,000 for our tithing contribution.
5. Is there anyone outside your immediate family that may need your financial support?  How much for them? Aging parents, disabled relatives…that’s what families are for.  Add $10,000.
6. What do you need to contribute to your retirement funds for the year? How does your back feel?  Are your knees snap, crackle, popping?  If you are 40 years old and have been a physical phenom for the last 20 years, you are on borrowed time.  Just how long do you think you can take?  If you don’t have a retirement fund started (most folks don’t) you will have to contribute pretty heavily to avoid retiring as a homeless person. Say your bare bones per year is $35,000.  Assume you retire at 55 and live to be 75.

20 x $35,000 = $700,000.

A financial adviser can map out a savings plan for you.  And I haven’t bothered with details like interest and inflation – this is a quick and dirty formula.  But can you see that you must create the money now.  Otherwise,  you’ll be living where you don’t want to live and driving what you don’t want to drive.I’ll put in $20,000 for this year’s contribution.  Plus $1 for a lottery ticket.

7. Add in insurance and any other benefits that seem appropriate. Use a Fed Ex driver for inspiration.  What does his benefit package look like? Plug in $15,000.
8. What else?  College funds for the kids?  Major orthodontia?  Weddings and Bar Mitzvahs? You know a really top-drawer shindig can set you back.  Let’s put in $5,000.

OK, let’s total up the take home pay you need to live the way you want to live___________.

My dollars add up to $150,001.  Not extravagant….

Now, inflate that amount to create a pre-tax figure.

___________________ / .70 = $______________________

Remember, this is just a simple little exercise.  Lots of things can influence your actual tax burden.  That’s what accountants are for.  I’m going to assume that 30% of your gross salary will go to pay taxes.  That is not a ridiculous assumption.  So, using my numbers…

$150,001 / .70 =  $214,287 

So, in order to take home $150,001 you need to pay yourself gross wages of $214,287.  Then, Uncle Sam will take 30% of $214,287; you’ll pay $64,286 in taxes.  You follow this?  (Note…I divided by .70 instead of multiplying by 1.30.  This is the difference between margin and markup – two commonly misunderstood words.  If you aren’t clear on this, call me at 417.753.3998.)

How much do you need to charge per hour to cover JUST your desired salary?  

                Gross Wages / Billable hours = per hour price for your salary.

Do the calculation…

$____________ / __________ billable hours =  $_________ per hour.

Remember you are a one-person shop with lots of things to do.  If you generated 1000 billable hours per year, I would be proud of you.

$ 214,287 / 1000 = $214 per hour.

Sobering isn’t it?

And you haven’t bought a tool yet or any business insurance.  Or a mobile phone.  Or a piece of paper.

It is up to you to assign a value to your services. Base that price on what you think you are worth.  I think you are priceless.  But come up with something between infinity and what you are charging right now.   You may choose to shave some dollars from items 1 – 8 through but I challenge you to come up with something less than $100 per hour.

Think you could sell your labor hour for less and make up the difference with material sales?  Let me ask you…is your value to the marketplace your ability to sell material?  Or do customers value your ability to assemble a perfectly functioning, comfortable heating system?  My friend, if someone is looking for material, they will go to Home Depot.

This exercise might scare the pants off you.  You might decide that, really, you aren’t worth that much.  That the hassle of asking for that price is too much.  That, it would be fine, if everyone else in your industry realized what they were worth and charged that much.

Even if you don’t choose to incorporate this into your selling prices, promise me at least this: you will never call anyone in your beautiful, wonderful industry a ‘price gouger’ for charging more than you do.

This blog is an excerpt from my book, How Much Should I Charge?

Ready to craft your budget to create profits? Join me on Wednesday, March 20th for a 60 minute LIVE workshop where you will get:

• The Live Interactive GoToWebinar
• Bonus Q & A session with Ellen Rohr
• Downloadable forms to help you create a profitable budget

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