Pay yourself first? Last is how small biz often works

By Beth Pinsker

NEW YORK, March 12 () - Everyone knows the Golden Rule of business is to pay yourself first. But more than half of small business owners are going months without pay - if they are taking any at all.

About a quarter of these entrepreneurs go two to six months without pay, and another quarter have gone more than six months without salary, according to a recent survey from Kabbage, a cash flow optimization platform (graphic).

taking checks, and a median check of $5,944, according to Gusto spokesman Rick Chen. The lowest draws were in January, with just 26 owners taking pay, for an average of just $1,991.

"It's tough. People have to budget," said Mike Savage, a certified public accountant CPA and chief executive officer of 1-800Accountant, which offers financial services to small business owners. "We encourage people to budget accordingly - plan for the worst and hope for the best." (graphic).


Tony Hernandez, owner of Cienfuegos Cuban Cafe in Simi Valley, California, is among those who have not taken a paycheck at all.

Since he started his food business over three years ago, he has earned tips, but otherwise it all goes back into the business. Some expenses, like his car and gas, get billed through the company. His wife's job covers living costs and provides health insurance for them and their two kids.

"I don't know how else I would be able to do something like this without my wife," said Hernandez, 46.

For Hernandez, long-term planning is less about retirement than about expanding to a second location, with the ultimate dream of a stall at the Los Angeles airport.

"The way I look at my business is: I'm fully invested in this to make it work. That's investing in my retirement," said Hernandez.

What keeps Joanne Sonenshine up at night has been the inability to plan. The 42-year-old runs a partnership advisory company in Washington called Connective Impact that helps connect companies to investments with social impact. She regularly takes a salary, but often has to pause it, depending on when clients pay.

The partial U.S. government shutdown at the beginning of the year was particularly crippling, because many of her clients depend on federal funding. Two big contracts disappeared suddenly.

"A huge amount of money went up in smoke. I can't catch up with that," said Sonenshine. "You start to worry if you can make it. There's the fear of failure, the fear of letting your family down. What happens if I can't pay my taxes? Will the IRS come after me?"


This is, indeed, a daunting year for small business taxes. The Tax Cuts & Job Acts passed in 2017 created a new 20 percent deduction for individuals earning business income - but the fine print is complicated. Those paying quarterly taxes in 2018 before all the rules were sorted out may have to make adjustments. That is on top of the difficulty of figuring out quarterly tax payments on fluctuating income.

"With the new tax law, there's even more incentive for the self-employed entrepreneur to pay themselves less," said Savage, because they will avoid payroll taxes and other withholdings and boost their deduction.

While more careful cash management may help control the symptoms, this may be one problem for which there is no cure. Most businesses run on small margins, and they are always expanding so as not to stagnate.

"We'll always been chasing our tails, in effect," said Rich Patterson, who runs his own marketing company that makes custom products in Vancouver, Canada.

Patterson, 48, had to pause his pay over the summer, when there was a worrisome lag. "I watch the sales figure really closely, and I knew we were having a good year. It didn't seem to match up why we were having cash flow problems," Patterson said.

The choice became paying himself and contributing to retirement or paying his staff. "Honestly, it's just not possible to pay yourself first," Patterson said. "I wouldn't be able to sleep at night if other people are losing out."

Pay yourself last?

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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