Navigating the financial aspects of being an independent nail technician or salon owner can be complex, especially when it comes to compensating yourself. This post is dedicated to demystifying the process of paying yourself, ensuring you maintain a healthy balance between a rewarding income and a thriving business.

Table of Contents

  1. Introduction to Paying Yourself
  2. Understanding Your Business Finances
  3. Automating Your Compensation
  4. Determining Your Pay: Percentage vs. Flat Rate
  5. The Importance of a Salary as a Business Expense
  6. Options for Withdrawing Business Profits
  7. Navigating Tax Implications

Introduction to Paying Yourself

As a nail technician operating as a sole proprietor or CIPC registered company, it's crucial to establish a structured approach to pay yourself. While the concept might feel odd initially, setting a consistent compensation schedule is key to your personal and business financial health.

Understanding Your Business Finances

Start by examining your profit and loss statement to understand what your business can realistically afford. Familiarize yourself with essential financial metrics and consider your tax obligations as a small business owner.

A deep dive into what you charge for services may be necessary here. Should you require help with this then read more here.

Automating Your Compensation

Once you've identified a sustainable compensation amount, automate the payment process. Similar to automated client communications, setting up regular transfers from your business account to your personal account can simplify your financial management and ensure consistent income flow.

Determining Your Pay: Percentage vs. Flat Rate

Your compensation should reflect a portion of your business revenue that feels right and is financially viable. Options include:

  • Percentage-Based: Choose a percentage of your revenue, ensuring it aligns with your business's financial health and your personal needs.
  • Flat Rate: Opt for a consistent weekly or monthly sum that reflects your typical earnings and workload.

The Importance of a Salary as a Business Expense

Treating your salary as a business expense not only formalizes your role as an employee of your business but also has tax implications. It can reduce your business's taxable profit, thus potentially lowering your overall tax liability.

Options for Withdrawing Business Profits

Business owners typically utilize one of four methods to pay themselves, each with unique tax considerations:

  1. Drawings: Withdrawing funds without an official salary, affecting your loan account but not your income tax directly. Practical example: Your business makes R200,000 profit. You draw R100,000. The business still pays tax on R200,000, leaving you with a net income of R100,000, but this increases your loan account.
  2. Director’s Fees: Paying yourself as an expense, reducing company profit but increasing your personal tax responsibility. Practical example: Your business profit is R200,000 before fees. You claim R100,000, reducing business profit to R100,000. Business tax is on R100,000, and your personal tax on R100,000 would be around R3,042, giving you a net income of R96,958.
  3. Declare a Salary: A formal salary reduces company profit and personal tax is handled via PAYE, simplifying tax obligations. Practical example: Business profit is R200,000 before salaries. You take a R100,000 salary, reducing profit to R94,000. Company tax is on R94,000, and personal tax on R106,000 (including a R6,000 cell phone allowance) is around R4,122, netting you R101,878.
  4. Dividends: Profits distributed to shareholders, subject to double taxation but can be an effective way to utilize after-tax profits. Practical example: After a R100,000 salary, business profit is R100,000. Company tax leaves R72,000. You take a R50,000 dividend, taxed at R10,000, giving you a total net personal income of R136,958.

Navigating Tax Implications

Understanding the tax implications of each withdrawal method is crucial. Whether it's managing drawings, handling director's fees, setting up a formal salary, or distributing dividends, each affects your and your business's tax obligations differently. Consulting with a tax professional can provide tailored advice, ensuring you optimize your tax position while remaining compliant.

Conclusion: Paying yourself as a nail technician business owner is about finding a balance that rewards your hard work and sustains your business's growth. By understanding your finances, automating your salary, and navigating tax implications wisely, you can enjoy the fruits of your labour without compromising your business's financial health.

Author: Margie Van Rensburg with Credit to Schedulicity and Bizmag.co.za