...in private practice as a Therapist or a Mental Health Practitioner
First thing first: You deserve a great bear hug from yours truly.
You've made the first—and often the hardest—hurdle of entrepreneurship, which is getting people to pay you for what you’re worth.
It's a big deal. Take that in for a moment.
Now you've got money coming into your private practice. You're not sure what to do with it from here, and some questions you might be asking yourself:
How much do I need to save for taxes?
What do I reinvest?
Can I afford my own office?
How much should I pay myself?
Today, we’re tackling the last of those questions. We're diving into exactly how much money you should be taking out of your business to put back into your pocket. You got to eat and pay rent, right?
So, how exactly do you do that?
Well, it depends.
I know, I know. You're probably rolling your eyes and thinking, "What the heck kind of answer is that, Loc?"
Hear me out: Your goals and the stage of your business affect how much you can and should be taking out of your business.
So bear with me as I will lay out how much you should pay yourself at every point along the entrepreneurial path as you start growing your business.
Plus, to prove that this matters, I will share where I am currently at in the game and what this looks like for me.
The Side Hustle State
Think of this state as another stream of income that you could use to pay off loans faster, vacation savings, or putting toward chasing a passion that your full-time job may not afford.
Your side hustles will either be the "Forever" or "Stepping Stone." How you pay yourself in those situations is very different. Here's how to determine what to do in this stage.
Satisfy Where I'm At Status
Are you content with your full-time job, and your side hustle is a passion project that brings extra cash monthly?
That's great! You've done it!
At this point, anything other than your basic business expenses or what you want to reinvest back into the business earns you a profit. After you calculate the costs incurred by your new business computer, educational course, etc., that money is yours to put in your pocket.
Making It Full-Time Status
At this stage, your full-time job should be covering all your living expenses and maybe some business expenses to get your business up and running.
Most of what you make should then either be reinvested back into your business or building up savings so that one day you can quit your job and pursue your dream.
The struggle was real, I tell you! I was in this stage last year. It was HARD to put so much work into something and see next-to-nothing in my personal bank account to show for it.
But I knew that if I was disciplined, and invested in myself and my business, great things would come.
Every now and then, I gave myself a little reward during this stage.
AND THAT IS OKAY!
It's okay to take a little bit out for all that work, around 5-10% of the profit. But don’t go overboard. If you truly want to make this your life, you need to sacrifice a little now to get what you want later.
Full On Practice State
In this state, your business is your full-time job and you're bringing in a decent amount of money per year. It could be steady every month or up and down like waves, but how much you take out should not differ in either situation.
Why? Well, let me tell you.
Pay yourself a steady paycheck and only enough to fund your basic living expenses.
Let's say you earned $36K after tax last year in your business, which is $3k per month. Some months you make $7k, others you barely break even, but in total, it was a pretty good year for someone new.
In turn, the amount it costs you to live each month—including rent, groceries, insurances, utilities, and little entertainment to relieve, etc.—comes to $2,000. Check out my last to help you come up with this number. "Budgeting: Essential, Non-Essential, and Luxury Expenses"
So what you do is each month, you pay yourself the $2,000 to cover those basic living expenses. Then every quarter, semi-annual, or year, look at what you have left in the business that isn't used for future expenses and pay yourself a bonus.
That's pretty much it. Easy as 1 2 3!
Too often, entrepreneurs have a couple of great months and quickly spend all that cash, assuming those months will be there forever.
Unfortunately, they miss forecasting the down months, which causes panic. You get into selling mode, which means the quality of service and the clients you attract are not aligned.
Paying yourself the same amount per month helps you reduce that risk and stress when the business is not doing well. During those months, you can take the opportunity to plan for your next course or catch up on some back-office work.
I only recently made it to this state a few months ago, a huge accomplishment since I started my business full-time in the Fall of 2019! Looking back, it has been a great adventure, and I have no doubt there's more work to be done to take it to the next level.
At this point, you might want to pay yourself either through distributions or an S-Corp salary. If you’re still in the $0-$3,000 range in monthly income, the former will probably still suffice. When you get beyond that, it’s time to talk to an accountant—like yours truly—to see how to transition & save more in taxes.
Killing It Stage
You're on top of the world and making bank. Your schedule is full, and you have a waitlist of clients.
Here is where you can actually pay yourself like a capital-B Boss.
This state is pretty much like the previous state. You have more income—so you can pay yourself more! Sweet!
Maybe a lot more!
You still want to continue paying yourself a steady amount each month; however, you can increase your pay by giving yourself bonuses quarterly, semi-annually, or yearly. This way, you won't take all the money out of your business to fund personal expenses only to find out you've drained your enterprise dry!
If your business is in this state, you might want to elect to be taxed as an S-Corp. By doing this, your LLC would pay you a salary, and your distributions are taxed as income tax, not as self-employment tax.
That, my friend, is A LOT of saving itself!
I'll have more on that in a later post, but if you're at this stage, make sure to look into this. It could save you hundreds or potentially thousands in savings.