Give yourself a real paycheck

Hey there, Ben here. Two issues ago I said to pay yourself on a schedule, not on leftovers. This week is how to actually set the number.

Say you have a great spring. You take a big draw in May, buy something for the house, feel good. Then August gets slow, two big payments run 60 days late, and you skip your own pay for three months to make payroll. By December you're not sure what you made this year, and tax time brings a surprise. That rollercoaster isn't a cash problem. It's a pay-system problem. Your crew gets paid every week like clockwork. You should too.

How do you set owner pay that stays steady in good months and bad ones?

Here's a four-part owner pay system. The numbers are examples. Your CPA should help set the real ones, especially how pay and distributions are split for your entity type.

1. Set a base pay from your lean months, not your best ones.
Look back at the last 24 months and find your slowest stretch. Set base pay at a level the company can cover even then. Say your slowest quarter still produced $40,000 a month in profit. A base owner pay of $15,000 a month is something you can count on in August as well as May.

2. Hold back for taxes before you touch anything else.
Owner income often doesn't have taxes withheld the way a crew paycheck does. Open a separate tax reserve account. Say you move 30% of each distribution there as a placeholder until your CPA gives you the right rate. On $60,000 of quarterly distributions, that's $18,000 waiting when estimates are due. No more scrambling.

3. Take a quarterly true-up from real profit.
Base pay is the floor. Once a quarter, after the books close, take a bonus distribution from actual profit. Say the quarter cleared $90,000 more than planned. You might leave a third for working capital, send a third to taxes, and take a third. That's $30,000 to you, decided calmly from real numbers.

4. Keep a cash cushion so the system survives.
The pay system breaks if one late payment wipes out the operating account. Say your monthly overhead is $120,000. A goal of two to three months, or $240,000 to $360,000, in reserve lets you keep paying yourself while you chase slow payers.

Why this beats the rollercoaster.
Your family gets a steady number to plan around. Your tax bill is waiting in its own account. And good quarters still reward you, just on a schedule instead of on a whim. Say you stick with it for a full year. You'll know exactly what you made, what you set aside, and what you took, which is more than most owners can say in December. It also makes the company easier to run, because operating cash stops being your personal piggy bank.

Open your last 24 months of profit and loss. Circle the slowest three months. Write the average monthly profit from those months on a sticky note. That's the ceiling for your base pay.

The Contractor Wealth Playbook is free for Digest subscribers. It lays out this pay system alongside the rest of the Build, Protect, Invest, and Legacy basics, with checklists you can work through at your own pace. It's a quick read and built for owners in the $1M to $20M range.

Get your free Playbook →

Hit reply and tell me: what's your biggest headache with paying yourself: slow months, taxes, or just not knowing the right number?

Talk soon,
Ben

P.S. If you want the full pay system with checklists instead of piecing it together from emails, grab your free Playbook here.

Contractors Digest is for general educational purposes only and is not legal, tax, accounting, or investment advice. Talk with your own qualified advisors before making decisions for your business or family. Dollar examples are illustrative only.