Getting Started with Employee Relations
A big part of running a business is having good employee relations.
That's why I wanted to wrap up this course with an emphasis on those relations.
Even though we don't have employees.
Here's the deal: We ARE self employed. So in a sense, you should look at yourself as your employee. Treat that employee well.
A quick note on that: I'm talking right now about thinking of yourself as an employee of your business, but in principle only. It's one of those confusing things where there's enough legal mumbo jumbo. We're self employed but when it comes to taxes and other things we're not technically employees.
That said… treat your employee well.
Six Steps to Giving Yourself a Paycheck
I've talked a lot about making sure you think in terms of profit.
There's one thing you can do to really give yourself a feel for how your self employed earnings stack up to a job.
You can give yourself a paycheck.
We've touched on this before, especially talking about car costs. But here's what I want to recommend you do.
Step 1: Set up a different account to deposit your money into.
Do not have your Grubhub or Doordash money deposited into your personal checking. That money isn't your pay. Doing so is a good way to set yourself up for future problems.
There are things that have to happen before the money becomes yours to spend as though it were a paycheck. To allow yourself to do that, get a different account to have your money deposited into.
My credit union let me set up a sub-account that can take direct deposit. It actually let me set up several accounts which makes this process work very nicely.
Get your account, and change your direct deposit to go into that account.
Step 2: Take out your cost per mile for your car.
How much does your car cost per mile? You can go back to Day 18 where we talked about that. How many miles did you drive for the week? Multiply those miles by your cost per mile and set that amount of money aside.
If your car costs 30¢ per mile and you drove 500 miles, that's $150. Take that money out and put it in an account for your car expenses. When you buy gas, get an oil change, etc., you can reimburse yourself out of that fund.
Step 3: Take out money for your taxes.
The most visited page on my site addresses this topic. Personally, I found that 20% of what's left over after deducting the 57.5 cents per mile from my earnings has worked well. The percentage may vary for you.
Put that money where you can't touch it. Then send it in once a quarter to the IRS so you REALLY can't touch it.
You'll thank yourself at tax time.
Step 4: Give yourself paid time off.
Have you ever noticed how a lot of employers do paid time off? You accrue hours or days based on how much you work. Then you can use that accrued time for personal days or vacation days.
Why not do the same thing for yourself?
Here's a method you can use. It's a bit drawn out but it works:
- Determine how much paid time off you want to give yourself, in weeks. For example you want 3 weeks paid time off: Two for vacation and one for sick days or personal days.
- Subtract those weeks from 52 to get your working weeks.
- How much do you usually have left after your tax and car savings are taken out? Multiply that by your working weeks (your answer to #2). This is your yearly take home.
- Divide your yearly take home (Answer to #3) by 52. That's your weekly take home.
- Multiply your weekly take home (Answer to #4) by the number of weeks PTO you want. This is your Annual PTO.
- Divide your Annual PTO (answer to #5) by Working weeks (answer to #2). That's your weekly contribution.
Using the example of $1,000 per week take home.
I told you it was drawn out but let's do an example and see what it looks like.
- You decide you want to give yourself 3 weeks paid time off.
- 3 weeks subtracted from 52 is 49. You are working 49 weeks.
- You figure you usually have $500 left after taxes and your car allowance. Remember, you are working 49 weeks (3 weeks time off, right?). $500 x 49 = $24,500. That's how much you will take home each year.
- $24,500 divided by 52 is $471.15. If you add up all that you make in the 49 weeks, but divided it by 52 since there's 52 weeks in a year, your weekly take home is $471.15 in this example.
- You need to save up three weeks of your weekly take home over a year's time. 3 times $471.15 is $1,413.45.
- You need to save a little each week in the 49 weeks you are working in order to save that much. If you divide the $1,413.45 from step 5 by 49, it's $28.85. That's how much you save each week.
Is your head spinning yet?
Take your weekly savings and put it into a PTO fund.
So in the example you used, you had $500 after taxes and car expenses, right?
So now you took $28.85 and put that into your PTO fund.
You have $471.15 left over. That's your ultimate take home. You might remember that amount from step 5. So what you've done here is you made it so that in a year's time you have saved up three times that $471.15.
Does that make sense?
When you want to take a week off, you take $471.15 out of your PTO fund. You don't have to bother with taxes, you already saved tax money based on the money you earned. You don't have to bother with car savings because you're not driving for business. It's your week off.
So now you have $471.15. The same amount that was left after you took out your car, tax and PTO funds.
You just gave yourself some paid time off.
Step 5: Are there other benefits you you need to give yourself?
What about health care? Do you have to pay for it out of your delivery earnings?
Many of us have spouses that receive health insurance as part of their job. Many others have a regular job that provides those benefits.
But if you have to do an ACA plan or something like that, you can decide if you want to pull a portion of the money out for that before giving yourself a paycheck.
If your premium is $200, take $50 out each week.
What about retirement?
Part of your taxes that we talked about earlier is your self employment plan. That basically makes sure you are covered for your social security. That said, it's not a good idea to rely only on social security.
You can take money out before your taxes (unfortunately it doesn't help your self employment tax) for some different IRA plans. A traditional IRA will let you take $6,000 out pre-tax ($500 per month). Because you are self employed there is also the option of a SEP IRA or a Solo 401k which allow you to take out more. I'm not going to try to cover those, that's a different topic – maybe a future article or podcast episode?
But say you want to max out your IRA. One way to do this is to take the money out before you give yourself a paycheck. Take $125 to put into your IRA. (52 weeks at that will come out $6500 – so you would find four weeks you don't take money out – maybe your vacation weeks?
6. Give yourself a paycheck.
You've taken your taxes out.
Your car money is set aside.
You took care of paid time off and maybe any other benefits.
All of this came out of the bank account that your gig pay was deposited into.
What's left? THAT is the money you put into your checking account. That is your take home pay. The money left after you took care of all the other stuff is your paycheck.
Is that not enough? That might be a chance to evaluate if you're really making what you thought you were making. Because now you have a very clear picture how well your business earnings compare with a job and benefits.