Paying yourself?

Discussion in 'Homesteading Questions' started by Cyngbaeld, Aug 26, 2004.

  1. Cyngbaeld

    Cyngbaeld In Remembrance Supporter

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    Just wondering how you all go about paying yourself for the hours put in on your homestead business. Do you keep track somehow as a business expense? Or do you just use the food/goods produced and call that your pay? I haven't turned a profit on anything and don't know when/if I will, but I feel my time and energy should count towards expenses somehow.
     
  2. Bob in WI

    Bob in WI Well-Known Member

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    Cyngbaeld said:


    We homesteaded for 25 years, and that is what we did to acount for our time. It is easy to account for your time if you wish, but you will never make much money by doing that. It is truly a labor of love. Our grown children can see the benefits of organic farming and animal raising. That is what our goal was. We wanted to show them how to do do things the simple and right way
     

  3. Shrek

    Shrek Singletree Moderator Staff Member

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    Its just income to support myself and is addressed as such.
     
  4. RAC

    RAC Guest

    Well, you actually can't charge for your labor as an expense, if you mean for tax purposes. So if you have stuff that you don't want to do, or would rather not do, say accounting or whatever, hire it out and let the business pay for it, making sure you get a receipt, in case you're audited. It is worth it if it gives you more time to be productive where you want to do the work yourself.

    As far as making sure it's "worth it" to you, decide how much is a reasonable hourly "wage" for you, accounting for any health/business insurance costs, and other expenses including admin time paying bills and so forth, and base your prices on that, remembering to keep within what the market will bear. And try to work smarter, not harder.
     
  5. uncle Will in In.

    uncle Will in In. Well-Known Member Supporter

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    If most small farmers paid themselves a decent hourly wage the farming enterprise would soon be bankrupt. You need to mark your time up to intangible benifits that can only come honest labor self imposed.
     
  6. Jen H

    Jen H Well-Known Member

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    How you structure paying yourself really depends on how you've set your business up. Our cidery is a corporation, because of liability concerns, so my husband and I are employees making $7.25 per hour. We have to pay ourselves a wage to make everything look right on paper in case there ever is an audit. The farm is a simple partnership and we just get whatever is left over after business expenses are paid (which ain't much).

    I found even when I was running a landscaping business, figuring out how much I was actually making per hour was just plain depressing. So I stopped trying to figure that out - I like what I do and that's enough of a return for my time.
     
  7. Jena

    Jena Well-Known Member

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    I have been reamed for this on various groups. I've been told if I don't account for an hourly wage for myself when pricing my products I A)will go out of business B) will cause everyone else to go out of business C) am "only a hobby farmer". I find the last one amusing as I find that the closer one is to a hobby status, the more concerned they are about getting an hourly wage!

    I farm for a living. It's what I do full-time. I generally work 12-16 hours a day in the warm months, but this year I have not been able to do many of my planned projects due to my hand injury. It's been a slow farm year, but then I've spent more time on selling meat.

    It's hard to pay yourself a wage for those kind of hours. Do I get overtime??? If I leave a gate open and have to go round up cows after I thought I was done for the day, do I still get paid? If I fix a fence that keeps the cows away from the chickens, do I credit those hours to cows or chickens? What category does the never-ending multi-flora rose battle time fall in? It just can get stupid!

    If I want an hourly wage, I'll go get a job!

    Jena
     
  8. texican

    texican Well-Known Member

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    I've thought about the "paying myself for work I've done for myself" before. So I work hard all day as a plumber, or electrician, or architect, etc...and charge 30$/hr. Alrighty, I made 300$ today. Write myself a check and deposit back into my bank account. A round robin...the only thing I've done is set up a paper trail for the taxman. I would presumably need to pay taxes on the income that I earned from myself, pay SS taxes, FICA, Medicare, Medicaid, and all the other heinous taxes that exist. My common sense tells me that I shouldn't set myself up for such a potential tax liability.

    I commonly refer to myself having made 300$, if I saved 300$, by doing something myself, that most people would have had to pay for. But I never think of it as pay. Pay involves outside income from handyman work, or selling/renting/leasing assets. When I do receive cash, it's never wages. It's operating funds. I can't do like a regular wage earner and just go out and spend it. If I did, I'd have to work all the time, and what's the point in that. Set goals/priorities, save often, spend rarely, avoid debt. I haven't seen a W2 in 8 years.
     
  9. Cyngbaeld

    Cyngbaeld In Remembrance Supporter

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    Guess what I was trying to get at and didn't put it very well was; if you have to show a profit in order to be considered a business and be able to deduct expenses on taxes, how does your time figure in? I am right aren't I, that the IRS won't allow you to deduct expenses on a hobby and if you don't show a profit, you are considered as a hobby and not a business? Don't want to run afoul of the revenoors....
     
  10. RAC

    RAC Guest

    You can't pay yourself a wage unless you incorporate--which is not cheap, and has its own headaches. Many think it shields you and your assets from liability, but not necessarily, especially if just you (or you and spouse) ARE the corporation.

    Look at Enron--the government is going after those at the very top. It can happen to heads of small companies too.
     
  11. Jen H

    Jen H Well-Known Member

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    Your time doesn't figure in at all. Your time is not and will never be an expense that you can consider. If you have registered a business with the state and federal governments, and have a valid business license, you are running a business. All of your expenses and operating costs have to be reasonable and accounted for. As long as you are actively participating in your business in the hopes of making a profit it is absolutely legitimate and you can deduct expenses. In fact, expect to not make money at all for the first 3 or 4 years.
     
  12. MorrisonCorner

    MorrisonCorner Mansfield, VT for 200 yrs

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    All valid points... there is a difference between accounting from a business standpoint, and accounting from a homesteader's standpoint. For example:

    My husband and I heat with wood. Roughly 6 cords of the stuff, give or take. To bring that wood into the house we have an investment in equipment, everything from gloves and hearing protection to a tractor, winch, chainsaw, and now a chipper shredder (the burning the tops thing got old). I calculate that we have, given the likey depreciation on this equipment, $750/year in overhead. Wood sells for $150/cord in our area. (150x6)-750=$150 for our time. Or, the value to our homestead in cash not outlayed for wood is $150. I don't get taxed on this, but I do do this calculation for almost all our projects.

    For example, the cost of a tiller for the garden is, give or take $750. If we assume the tiller will last 10 years with care, and cost $25/year to maintain, the tiller needs to add a minimum of $150 in additional production to our garden. In reality, that additional production will cost more in seed ($10) and fertilizer (ok, mulch hay... free), plus preserving supplies (freezer bags, jars, tops) so break even would be, in reality, closer to $180-190.

    It isn't likely a tiller would increase the garden we could manage by close to $200 in vegetable value. At $1.90/pound for organic broccolli, that's slightly over 105 pounds of broc a year more we'd have to consume.

    The husband, who isn't too fond of green stuff anyway, would not be happy! So the garden gets turned over by hand (shovel=$25!).

    Annual Sales = actual cash sales + value of any products you use yourself

    Total Cost of Goods Sold = consumable items used to make those products (seed, fertilizer, vet bills)

    Gross Profit = Annual Sales – Cost of Goods Sold

    Gross Margin = Gross Profit / Annual Sales (to make it a percentage, multiply by 100)

    Overhead = Your annual fixed costs, infrastructure items divided by the number of years of their useful life (tiller cost/10 years)

    Breakeven Sales = Overhead / Gross Margin

    Breakeven Point for a New Investment = Annual Additional Overhead / Breakeven Sales

    Ok.. BORING! Accounting geek speak! Run for the borders! But seriously... as a consultant to small farms and businesses I've found that the biggest stressor in relationships (outside of the inlaws) is when investments are made without a real solid grasp of the numbers. This is how farms/businesses/households get themselves into financial trouble. There is a big difference between wanting the big honking tractor, and being able to justify it with numbers. You may get the big honking tractor anyway :rolleyes: but you will know up front that a portion of that tractor is "entertainment" not related to its actual performance to the task at hand.

    Back to the tiller. I may WANT a tiller, but I (at least at age 45) don't NEED a tiller to produce what I need to produce. The additional productivity gained by the tiller is not something I need. Now, suppose I decide "fine... I'll do a little farm stand to pay for my new toy." Looking at the numbers, to break even I'd need to sell over 100 pounds of broccolli.

    Which tips us into the deep end of business plans and out of the scope of this thread.

    The most important number for a small farm to know: Breakeven.
     
  13. Jena

    Jena Well-Known Member

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    Hobby vs. business is not just all about profit. It is about intent. We almost never turn a profit on paper...depreciation and all that usually results in a substantial loss, but there is no doubt that our farm is a business.

    Time does not mean a thing. I can not write off my time as an expense in any way, shape or form.

    If I spend 4 hours sitting at a farmers market, I can write off the gas it took to get there, the $5 fee I pay and the I can depreciate my truck, trailer, freezers, but I can't write off anything for my time spent.

    Jena
     
  14. poorme

    poorme Well-Known Member

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    Anyone who tells you this is full of BS. Most "commercial" farmers wouldn't have a clue as to what their hourly wage would be. They don't even keep track of how many hours they work. Secondly it's just a made up number...impossible to assign a "wage" to each family member, the land, the barn, the tractor, the animals, etc. Best guess at a wage rate would be to use what wage you would receive from a job in town.
     
  15. Buckrun

    Buckrun Well-Known Member

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    Well when I went to myself and demanded to be paid. I remembered I am always broke :waa: so I told my self that if I wanted paid I would have to be fired. I said you can’t fire me I QUIT! :mad: So that year my garden went to pot. I had no good vegetables to eat that year. :haha: The next year I went to myself and asked for my job back. So from there on I have been content to receive fresh vegetables as my pay. :D I have been getting along with myself fairly well every since. Although sometimes I make myself work a little to hard and I get stiff & sore. So I call in sick. But I know I am just faking it. :eek:

    Steve
     
  16. amelia

    amelia Well-Known Member

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    Jena is right, it's not about profit, but rather about intent. If the issue were to arise with the IRS, profit would be but one of a whole host of factors that it would look at to determine whether your business is intended to be a serious money-making enterprise. There are very few businesses that turn a profit right away, and the IRS knows that. I believe that their rule of thumb (and it's just a rule of thumb) is that after 3 years of losses, the burden will be on you to show that the business is NOT a hobby. That only makes sense.

    If I understand your question correctly, the gesture of "paying yourself" will not get you anywhere tax-wise, assuing that you're operating this business as a sole proprietorship (i.e., basically just setting up shop and not using any formal entity such as a corporation or LLC). Think of it this way: You can pay yourself $30,000 a year and write off that amount as a business expense on Schedule C, but you'll have to turn around and declare it as income on another line of your tax return. The net effect is a wash.

    The situation is different, and far more complicated, in the event that you organize as a partnership, LLC or corporation. In that case, you would probably want to separate out your role as employee and owner. There are both practical and tax reasons for doing that. Just one example of how a corporation might benefit you is that the $30,000 you make in profits could likely be accurately allocated partly to "dividends" and partly to "salary." That portion of your take which represents dividends is not subject to self-employment tax. (Isn't that about 15% now?) That's just one example.

    The really big tax loopholes that the high-flyers use to magically eliminate all tax liability are not realistically available to us peons. Most of them have to do with depreciation of highly leveraged assets. Others are just plain fraudulent.

    IMHO, you are correct in devoting your limited time and energy to getting the business off the ground, and not mucking around in corporation and tax law.

    The one caveat that I would raise, however, has to do with liability. I do think that a corporation or LLC is a good way of protecting yourself--particularly if you are engaged in a business that could have some liability associated with it. I don't agree that these entities are worthless for asset protection, but in order to make them work you have scrupulously maintain all of the corporate formalities (meetings, record-keeping, separation of accounts, etc.). People get into trouble when they start treating the corporation as an extra personal bank account.

    Hope that helps. Good luck!
     
  17. Cyngbaeld

    Cyngbaeld In Remembrance Supporter

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    Thank you all for your thoughtful replies. I wanted to make sure I got off on the right foot without getting bogged down in the unnecessary details and missing the important ones.
     
  18. RAC

    RAC Guest

    I did not mean to imply that incorporating offers no liability/asset protection at all, it just means that someone suing you has to go through more hoops. If they have a good case, they may even win.

    If "the corporation" consists of just the two of you (say you make little craft widgets of some sort), no employees to insure, blame and/or fire, you ARE the people that someone will go after in court if the widget hurts someone, because they can directly tie you to said widget--either you or your wife made the widget.

    Under old corporate laws, no one would have gone after Ken Lay of Enron personally, the company would have borne the burden of liability for his actions. That is no longer the case.

    The above is one reason why many small operations do NOT incorporate, and instead just make sure they have very good insurance coverage. Now for tax reasons, it may make very good sense, but not necessarily for liability reasons anymore.
     
  19. Mike in Ohio

    Mike in Ohio Well-Known Member

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    To summarize, you will generally pay yourself by making a profit. One thing that I'm surprised no one has mentioned is the use of accounting for planning purposes.

    You should be conscious about the amount of hours it takes you for a particular endeavor but I wouldn't think just in terms of dollars for an hourly wage. If it takes me x amount of hours per year to produce honey and y amount of hours to make hay, I can compute the return on my hours for each activity assuming I can market my crop.

    For example, in a perfect year I might produce 2,000 square bales of hay from my land. I don't use it myself so my only option is to sell it. I can generally expect to get $2.00 per bale so that would be a maximum of $4,000 per year. After 2 seasons of trying to deal with hay I'm giving up on it because I can't figure a way that making hay makes economic sense for me. When I thought I could get it done as custom (contract) work it made sense because it was arbitrage. I had a price locked in and what I made was based on the difference between that and what I could sell it for. Not as many hours of work for me. Unfortunately the fellow who did my custom work the first year is no longer doing it. Buying the equipment myself makes no economic sense whatsoever.

    So, I'm looking at changing my use of the hay pasture. Part of it is going to be planted in black walnuts. Part of it is going to be fenced and I'm working out arrangements with a neighbor who runs cattle to do them on shares (feeder calves in the spring and sell em off in the fall). If my neighbor decides to take his share and overwinter them on hay, that is his choice. A certain amount of risk but the economics generally make more sense than hay.

    How do I account for the hours I spend on these activities? Not in terms of dollars but in terms of the profit I think I can make. I consider things like depreciation and capital invested (rate of return) as well.

    In this sense it is probably more important to make good decisions than to try to account for hours. In many cases it is difficult to account for activities just on the basis of dollars per hour (Sales and marketing). The customer base we have built up for honey gives us an instant market for our black walnut production (I already have people wanting to place orders and asking when we will be selling). This year we are still working out the production (processing and packing) so I'll be happy with whatever we do. As we hit our groove it should have a significant impact on revenues. When we do an event (gift show, fair, festival, etc) it takes the same amount of hours whether we have one product to offer or multiple ones.

    I guess the way I'd sum things up is not to get too focused on the hours you put into your efforts and instead spend some time making sure that your goals are realistic and obtainable. Create milestones and checkpoints. Be ready to adjust your plan to match reality.

    As usual, just my 2 cents.

    Mike
     
  20. Timedess

    Timedess Guest

    Welp... now after I read your question here, and all the detailed and thoughtful replies to it, I have one question for you (and maybe others who answered, too). The way you phrased it, makes me wonder if you are calling your homestead itself a "business" (as opposed to having an outside job, "I farm my own food" sort of thing) or do you do EXTRA "farming" to sell to others, and are calling *that* the "business"?

    I hope I'm making sense, here. What I mean, is- If our family moved to a piece of heaven out int he middle of nowhere, and we started to raise our own meat, eggs, produce, milk, etc., but it was just for *us*, are you saying that *that* is a 'business"? Or does it become a "business" when I sell my first dozen eggs? When does one have to start "checking in" with the IRS for homesteading? Or what? Maybe this ought to be a separate thread; if so, I apologize.

    in Him,
    Timedess