A contractor called about coaching a few months ago. When I asked about his profit, he said he did whatever he could to keep his income taxes at or next to zero. It was a recommendation from his bookkeeper, and he thought it was a great idea.
It’s not a great idea. I’m all for legal, legitimate means of reducing your tax burden, but limiting your profit is not how to do it. I dislike paying taxes as much as the next guy, but it sure beats losing money.
I’m not going to get into a discussion of “paying more taxes means the government bureaucrats have more money to give away and waste.” Take that to your congressmen and senators. They’re the ones holding the purse strings and wasting your tax dollars. Let’s stay focused on what’s good for you and your business.
Your goal should be to make as much profit as is reasonable, and be happy to pay the tax on that profit. When you have to pay income tax, it means you’re running your business well.
A consistent 8% minimum profit will all but eliminate financial problems for a construction related company. 10%, which is even better, will give you some hope of a retirement fund. 15%, which some of our coaching clients achieve, is retirement even sooner.
Profit is what you have after paying your salary. Owner’s salary is not profit, it’s an overhead expense. It is not and never should be considered profit. This is a check I tell contractors to use on their CPA. If they can’t explain the difference between your salary and profit, make sure you understand that difference and treat them accordingly, then find a new CPA.
The owner’s salary should be at least 8%. Your salary must be dictated by the volume of profitable business that your company does. If you can make more than 8%, great, take it. If you can’t pay yourself an 8% salary and still have 8% profit left, you aren’t charging enough for your work.
It is also important to pay a spouse if they’re working for the company. Everyone should be paid for the work that they do. No exceptions. If your CPA or bookkeeper tells you it’s okay for one spouse to draw a salary for both, find another CPA or bookkeeper. Think about what that approach does to social security benefits and, more subtly, to your relationship. If both of you are working in the business, both of you deserve the respect of being paid appropriately.
If you can’t afford to pay both spouses, again, you aren’t charging enough for your work. Your construction business isn’t supposed to be a non-profit organization with volunteer labor. Make the necessary changes for your business and your family.
There are eight warning signs of financial problems in your company. I’ve listed them below in the order they normally occur.
- Owner or spouse physically working on jobs for no pay
- Owner or spouse not taking a regular salary
- Cutting prices to get a job
- Inability to pay off credit cards
- Paying old bills with money from new jobs
- Partial or no payments on bills due
- Employees not being paid on time
- Checks bouncing
If you see these warning signs in your business and don’t get help, you are on your way out of business. A construction business isn’t supposed to be a non-profit organization with volunteer labor. We want you to be paid for your work so you can take care of your family, your employees, and their families. The only way you can be paid for your work is if you’re charging enough for the work you do.
Remember, the definition of insanity is doing the same thing over and over again and expecting different results. Make the necessary changes for your business and your family. Let us know if we can help.
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