Blog

If you run your business as a Pty Ltd company (rather than a sole trader, or partnership structure); you’ll generally be required to pay yourself a wage, on which superannuation is attached.

Deciding the right wage to take from your company can be quite a confusing process, especially if you’re used to running your business under a sole trader structure. Plenty of new company owners have no formal process for paying their own wages, and unfortunately, a lack of structure in this regard can lead to both tax and financial (budgeting) issues down the line.

The below steps will teach you how to decide on the optimal wage to pay yourself from your company while also helping you to take stock of, and refine your spending habits.

Step 1

Obtain a conservative estimate of your projected monthly turnover/sales.

Factor in any regular/retainer income first and from there use a reasonable, conservative means to project out your total sales revenue. (a)

Step 2

Deduct from this figure your projection of all business/tax-deductible costs for the month (b).

This will include anything work-related from the cost of goods/materials, travel (e.g. Ubers), regular subscriptions, staff/contractor costs, rents (including a % of your home rent if you are renting and working from home), and anything else that you predict you’ll be able to claim as a tax deduction against your income.

Step 3

Prepare a projection of all personal (non-tax deductible) expenses that you typically incur within a 1 month period.

Run through all of your bank/credit card accounts and add up your total personal direct debits and subscriptions within a month. Next, include all other regular/recurring expenses that you predict you will incur from all key areas of your personal life: family, health, living costs, fun, etc. I recommend thinking about your daily, weekly, and monthly activities and habits in order to help you prepare this list. You could review bank statements, your Apple ID for app subscriptions, and even your Uber Eats app to get this gauge as accurate as possible. Map these expenses into an excel schedule. (c)

Step 4

Run through the lists you prepared above in (b) and (c) and mark each item as “necessary”, “nice to have” and “don’t need.”

Obviously, cancel anything you don’t need first up. Next to the “nice to haves”; list ways that you could either reduce these costs or achieve the same outcome in a different manner that may reduce or eliminate these costs altogether. This step is generally quite a surprising and satisfying one. If deep down you know you are overspending in a certain category; the temptation can be to bury your head in the sand and put off facing the harsh reality of what you’re actually forking out unnecessarily each month. It’s important to remember that getting a gauge of what you are spending is a necessary step in moving you onto a more positive financial trajectory. You may not be able to immediately change your existing spending habits, but at least by having an understanding of exactly where your money is currently going, you can begin to think about taking steps to create better spending patterns.

Step 5

Tally up your new total estimate of personal monthly spending after you’ve run through the steps to refine your spending in points (3) and (4) above. (d)

Ideally, you’ll be able to afford to treat this figure as your net wage (at a minimum- not factoring in any personal savings).

From here, what you need to do is gross this net figure up to factor in tax. In order to do this, I recommend using an online calculator such as this one: https://paycalculator.com.au/.

Onto your figure (d); you’ll need to add tax and superannuation (currently 10% of your gross wage). You’ll see that the calculator gives you various time period options. I personally find looking at things monthly is easiest due to the fact that most subscription direct debits are monthly.

Step 6

Massage the numbers until you reach your desired goal. As mentioned above, in an ideal world, your revenue less business expenses will result in a net profit that more than covers your personal expenses (for the purposes of this exercise we will call that your net wage), tax on that wage, as well as superannuation. In this case, you’d simply add an additional amount onto your figure (d) above, to cover personal savings – gross this up for tax and superannuation, and your wage is then decided.

If you’re a relatively new business owner or you are stepping through this process for the first time; you’re likely to find that you have a shortfall on your hands. In this case, you’ll need to revisit your expenses in order to see what you can afford to cut down on.

Step 7

Set your wage.

While I advise you during this process to run your projections over a month, this doesn’t mean you must pay yourself monthly. In fact, you might find at least to start out with, that a weekly wage is a better option because if you find that you’re running things a bit tightly (or perhaps your sales are far better than you expected); you can tweak the next week’s wage to a more optimal amount. To set your weekly wage, simply multiply your monthly projection by 12 and then divide by 52 weeks.

As soon as you’re ready to take an income from your company, it’s super important that you take the time required to determine your optimal, regular wage. A regular wage provides structure and visibility, and it enables control and clear future planning and budgeting.