When switching from PAYE to self-employment, it is very tempting to beleive we have shuffled off the coil of living on a fixed income, and this is true to a point. It is true that as self employed people there is no limit to what we can earn, we have agreed no maximum salary, and along as we can sell more than we can spend, we have an income.

But how much income? As PAYE people, we knew exactly how much income. We got a paycheck that said, this how much we agreed to pay you, this is how much your government wants, and look here, this is how much you get to keep and spend on whatever you want and we are not going to ask for it back later.

Not so for the self employed. We get to collect money that is NOT OURS all day long. People give us money such as VAT, that rightly belongs to the government, ask us mind it for awhile, and then hand it over a few months later, just as we are getting used to it. Did you ever take in a lost puppy, and while waiting for the owners to come, forget that the cute little fluffy fella does not belong to you? You took it for walks, out to dinner, maybe even on holidays. You might have even give it to others to enjoy, like suppliers or employees.

But sooner or later the real owner comes back, taking the puppy and leaving behind with heartache. You have grown far too attached to something that wasn’t yours, and now you have to pay.

So what’s the alternative? How, as self employed people, can we learn to keep a respectful distance from that which is not ours? How do we stop using our business like a credit card at an ATM machine? How much of our profit are we entitled to pocket?

It comes from being aware at all times how much money in the business represents our own puppy, and how much has to be returned to its rightful owner. And how do we do that? First of all by understanding that as self employed people, our business profits are equivalent to our old PAYE gross salary, and keeping an eye on its progress weekly or at the very least monthly. Knowing your profit allows you to work out how much money in your business belongs to you, using the tool I am about to share with you.

For example, we are three months into the year now. Let’s say our profit (sales minus business expenses) to date is 20,000 euros. To project what it will be for the year, I am going to divide by 3 months and multiply by 12 months. That gives me a probable 80,000 profit by year end. To see how much of that is mine, I can use the following tool. The tool tells me that on 80,000 profit, 35% of it will go on PAYE and PRSI. So for every 650 I take out of the business for myself, I better have an extra 350 ready to pay the tax.

I can easily sanity check whether I taken only my money out of the business so far this year, or whether I have dipped into Other Peoples Money. For my 20,000 profit, 13,000 is my puppy. If I have taken more than that so far this year, I need to be aware that I need to take less later, OR sell more! I do need to be aware that if I sell more and my profit increases, my tax percentage will also increase, so I need to go back to the tool to check on this.

 Where’s the tool? It’s right here, please give it a go, any questions just ask!