How to Pay Yourself Efficiently as an Entrepreneur
Variable income is great because you can usually make much more, but there is also the additional stress and risk of managing the big income fluctuations.
The highs, and lows can be tough, and mess with your finances quite a bit.
In this article we are going to discuss a simple solution to this problem of an entrepreneur's fluctuating income.
Setting yourself up on payroll
The solution is to pay yourself a salary that you need to live on, and leave the rest in the company.
The assumption is that you are a business owner, who is incorporated. However, even if you aren't this strategy can still work.
To begin with you need to figure out how much you need to live and to pay all your bills every month.
Once you've determined this, you set yourself up on a salary payroll from your company, and you pay yourself the same amount every two weeks.
You can automate this process by using a payroll company, the big ones in Canada are ADP or Ceridian. Alternatively, your bookkeeper or accountant will also offer this service.
Managing your taxes
They also manage all the taxes and the deductions off every paycheck so you don't have to worry about saving a large sum for income tax at the end of the year.
It's crazy how many business owners get into trouble with income tax, but doing it this way solves a lot of this problem.
We personally recommend you get a payroll company, an accountant, or a bookkeeper to do this, as it's totally worth it to avoid the hassle. Plus it's not that much per month.
How this strategy helps with long term savings goals
Setting yourself up on payroll helps to combat lifestyle creep or Parkinson's Law.
As you start making more money, you spend more. However, by paying yourself the same every month you don't get that paycheck and lifestyle inflation.
At the end of the year you should have a surplus in your company, which is called net income, or profit.
You can then take that profit and let it flow into your holding company tax free as an intercompany dividend. Obviously, consult your accountant on this, but the idea is to transfer your money from your operating company to your holding company.
In the long term your holding company then becomes your money and investment storage vehicle.
If you haven't yet, and are interested on setting one up we have two videos on YouTube about how to set up a holding company. You can watch Part 1 here, and Part 2 here.
Contact Us
At Safe Pacific Financial, we specialize in helping Canadian business owners, incorporated professionals, and investors structure life insurance for maximum wealth protection, tax savings, and business growth.
If you would like to discuss whole life insurance or investments, we’re happy to chat and see if we can be a good fit to work with you. Fill out our contact form and we will get back to you within 24 hours on business days.
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