29 Jun Paying Yourself
Posted at 06:30h in Blog by Steve Trang 0 Comments
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Today, we’re going to be talking about paying yourself. A lot of you may have started your LLC and paid yourself through your LLC, which is a significant first step. But what you may not have done is elect for S Corp recognition in dealing with IRS.
Register as an LLC?
And what I mean by that is, if you register as an LLC, as far as the federal government goes, you are a partnership, which is not a terrible thing. The problem you’re going to run into is you’re going to be paying excess FICA. This is the money to set aside for Medicare and so on.
Pay Yourself a Wage
So what you wanted to, as you start doing deals, this is not after you’ve done one deal, two deals, and so on. This is after you start doing deals consistently is paying yourself a wage.
Have Your LLC Elected as S Corp
You want to have payroll run out of your company. The first thing you want to do there is having your LLC elected as an S Corp.
And so the common mistake I see all the time is when someone does not elect to be an S Corp, they’re paying FICA, which is 15.3% on the entire profits of their organization. So if you’re making 30,000, you’re paying FICA on $30,000, 15.3%, which is not awful. But if you’re making 60,000, you’re paying 15.3% on all of that, again, not terrible. But if you make 200,000, you’re paying 15.3% on all 200,000. Now we’re having a problem.
Anything over 100,000 that you’re paying FICA on thinking about that 15% on 100,000, that’s $15,000. That money could be used wisely to invest into yourself, back into the business, whatever. So one of the first things you want to do is elect to be taxed as an S Corp. And then you want to start paying yourself a wage right after that.
Comfortably Pay Yourself
Now, some people are uncomfortable, uncomfortable paying themselves a regular salary. But I would argue, and this might sound, you know, high and mighty here, but I would argue you have a genuine business until you can pay yourself a regular living wage. So maybe you start at 2000 a month, 3000 a month, 4000 a month. But you should be paying yourself a monthly salary. And whatever you’re paying yourself on that monthly salary because you’re self-employed, you are paying the whole 15.3% FICA on it.
However, you do not have to pay FICA for any additional profit over your salary. And that’s where we’re talking about tax savings, being smarter with your money.
Takeaways on Paying Yourself
Now, don’t forget, I’m not an accountant. I’m not a CPA. I’m not an IRS individual entity, nothing like that. I’m just telling you what I do with my business, something for you to consider if you don’t want to pay excess taxes on your income.
One thing I wish I had learned earlier in my career was to pay myself first. Now I knew growing up that you always paid yourself first, right? You take whatever money you made for your W-2 wage and set aside 10% into savings, never to be looked at again.
And if you did that, you would naturally save money. Once I became self-employed, I completely threw the idea out the window, thinking that it doesn’t make sense in business. And I got into this grind. You know you got to grind, pay yourself as little as possible, invest everything back into the company, which is, you know, a popular concept. You hear people say all the time, and I was that person. And I want you to sit back and think about if you were that person, and you went through COVID, real estate aside, a lot of businesses got hurt. How many families said one day, I’ll pay myself, I’m going to grind, I’m going to invest in a company, I’m going to grind them and invest in the business. And one day, I’ll pay myself. And when COVID struck, how many of those business owners lost everything.
So not only did they lose their whole business, but all those years of sacrifice in one day, I’ll pay myself back.
Parkinson’s Law
And so I know again, the conventional wisdom in our industry, in real estate, is to grind and pay yourself as little as possible. And I’m here to tell you; I wish I had paid myself first earlier because then I would have more money. Because what happens, and they will talk about this enough, is a principle called Parkinson’s Law.
Parkinson’s Law states, however, that money set aside is how much you spend. And so, if you don’t set money aside, you will spend all that money. I’ll give you a couple of examples. Think about the last time you traveled somewhere. Was your suitcase full or partially full when you left your home? Odds are it was jam-packed. You fill it to the brim. Think about your room, is it used 100% or 30%? Think about the last time you ate dinner. Did you eat the entire plate? Or do you eat like 30% of the plate?
So what we do naturally, as humans, is we will consume the entirety of the space, or the budget, or whatever, like a contractor who will never come in under budget. They will use the entire budget on a flip.
What to do?
And so, profit first says instead of paying yourself last, you should pay yourself first. So here’s what I recommend: take 10% of whatever you make, and set it aside for profit. This is money that you’re going to live off of. This money will go towards your wages as well, but 10%, right up top to pay yourself. And then after that 10%, set aside for charity, tithing, whatever you want to do, whatever your purpose, mission, and so on, and take another 10% assigned to reinvest in yourself in your education.
Invest in Education
I’ve met many successful people in this industry, in real estate. And there’s one consistent thing, as they’ve all invested in their personal development, no one achieved massive success by also refusing to invest in their education. So taking 10%, invest it back into education. And after that, whatever is left over, the money goes into the business. That’s the money you pay your taxes out of, or whatever the case is, the important money is already set aside. And now you get to work off the difference.
And again, Parkinson’s Law says that if you only get 70% of income to work with, that’s what you’re going to work with. That’s what you’re going to put into your business. But if you don’t pay yourself first, you will magically spend 100% of your money back into your business. And you’re going to run into a situation looking later on wondering, I know I made a lot of money. Where did it all go? If you ask yourself that question, you’re not paying yourself first.
Last Thoughts
And one last bit of advice is that I wish someone would have told me when I was starting: you don’t need to be your bookkeeper. I always was like, and I’ll take care of this and get caught up on our books on the weekend. Maybe I’ll set aside some time to get caught up in my books. If you’re in this business, you’re not the kind of person who likes to work on your QuickBooks, accounting, etc. For that reason, you never will and never come to love it.
So as soon as possible, hire a bookkeeper, either within your administrative team, a VA assistant, or eventually have a profit first certified accountant. That’s what I use. And that’s what’s helped me gain massive clarity in my business.
