How to decide your salary as a solo entrepreneur

Working for yourself is a great way to reestablish your work-life balance while making a great living. Becoming a solo entrepreneur can be rewarding, too, as your income is determined by your own effort and ingenuity. 

However, many solo entrepreneurs struggle to set their salary. This means that some fail to reinvest their profits into their business while others don’t leave enough to cover personal expenses and taxes at the end of the year. 

Take a considered approach when setting your salary. This will help you navigate legal loopholes and ensure you have enough funds left over for life outside of work. 

Tax planning

Income tax has caught many inexperienced entrepreneurs by surprise in the past. But, as a business owner and solo entrepreneur, you must account for taxes and other fees before you start figuring out what your take-home pay should be. 

As a solo entrepreneur, you are probably classed as a “sole trader” for tax purposes. This is good news, as sole trader is the simplest tax classification. Your business income is taxed the same as any other income you have using the marginal rate of tax. You don’t have many costs and you may be eligible for certain benefits if your profits are low. 

Working with a registered accountant is key when planning for taxes. An accountant can help sort through your expenses and figure out how much profit you need to declare for tax purposes. They can also help you set a reasonable instalment amount based on your predicted income and will ensure that you don’t end up paying too much tax. 

Once you’ve calculated your profits and the amount of tax you’re set to pay, you can begin to decide whether you want to invest your revenue into new equipment and resources or simply boost your profits. It’s worth pointing out, however, that you can only claim a portion of the expense if it is for business and personal use. 

Financial stability

Effective personal finance management is key for solo entrepreneurs, as it directly affects your business. It’s tempting to reinvest all of your revenue into your entrepreneurial venture and maximize your company’s growth. However, failing to pay yourself enough can result in personal issues like late car payments and missing direct debits. This can undermine your credit score and leave you in hot water when you want to take a loan out for your business. 

Deciding to take home a stable salary can improve your financial position and strengthen your business, too. A stable salary ensures that you’re able to pay off credit cards in a timely fashion and will be valuable when you want to apply for a mortgage. Constantly underpaying yourself can be a red flag to some banks who want to see a stable income for a number of years before giving you a mortgage or loan. 

Taking care of your personal finances can alleviate some of the stress you face, too. Needlessly underpaying yourself isn’t a sacrifice you need to make as the owner of solo entrepreneurship. Instead, pay yourself a wage that leaves money for reinvestment but represents the time and effort you’ve put into building your brand. This is deeply motivating, too, as spending some of your hard-earned cash on a new car or a vacation can renew your focus for the future. 

Savvy ways to maximise your salary

You shouldn’t try to game the tax system as a solo entrepreneur, but you can make a few savvy changes to the way you pay yourself with the help of an accountant. Any accountant worth their salt can help you work through salary and payment options like: 

• Putting yourself on the books as an employee
• Payment via dividends
• Trust structures
• Bonuses
• Director’s fees

To be clear, you cannot make these decisions alone. You need to find a trusted accountant who can help you navigate the options available to you as your business grows. 

Working with a trusted accountant can help you avoid scams targeting small businesses, too. Phishing and social engineering prey on small business owners and may lead to blackmail or illegal requests for payment. If you’re ever uncertain, slow down and reach out to a trusted accountant who can help you protect your profits from scammers. 

Setting your salary as a solo entrepreneur is an important financial decision that will impact your professional and personal life. Get started by working with an accountant who can help you build a robust tax strategy. This will give you the information you need to make wise financial decisions and ensure that you have enough left over to reinvest into your ever-growing business. 

This article was originally published in December 2023.

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