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How do the numbers work in a million-dollar practice? How much should an owner get paid in a solo and group practice? What is the standard practice for dividing up income?
In this podcast episode, Joe Sanok speaks about how much an owner should get paid.
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In This Podcast
- The Profit First method
- Some basic numbers
- A million-dollar practice
The Profit First method
The traditional business system follows that money is first spent on paying for expenses, processes, and transactions, and anything that is left over is then given to the owner as their income.
Mike [Michalowicz] flips that and says, “Well, why don’t we pay the profit off of the gross first … and we’ll just make sure that the operations align after that,” which in some situations does make sense.
This formula can work really well with some slight adjustments.
To use the Profit First system, you need to set up different accounts and pay your profit into an account at the same time that you pay your expenses.
There’s a lot of great things about [this system] because then you’re allocating for your taxes automatically, allocating for your operations, your payroll [and so forth].
45% of the net income. So, if you’re bringing $100k as gross income, you need to take $45k home and the other $55k goes towards taxes and business expenses.
1 – Solo practice:
$100k total income in the business:
- 30% goes to expenses
- 15-20% to your tax bracket
- 50-55% as owner pay
The tax numbers I’m using are based on Michalowicz’s and other accountants’ … but you always want to check with your own tax and accounting professional.
2 – Group practice:
$100k to $250k total income in the business based on a 50/50 split:
- $75k is paid to clinicians
- 10% for operating costs
- 15% for taxes
- 42.5% as owner pay
3 – Group practice:
$250k to $500k income based on a 50/50 split:
- $200k is paid to clinicians
- 25% for operating costs and taxes
- 40% of total gross profits as owner pay
A million-dollar practice
(Based on a 50/50 model)
- The owner bringing in $100k
- $450k is paid to clinicians
- 25% is paid to operations and taxes
- 38.57% as owner pay
If you’re [using] a W2 model, these numbers will definitely shift and change where you have some very clear fixed costs.
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Meet Joe Sanok
Joe Sanok helps counselors to create thriving practices that are the envy of other counselors. He has helped counselors to grow their businesses by 50-500% and is proud of all the private practice owners that are growing their income, influence, and impact on the world. Click here to explore consulting with Joe.
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This is the Practice of the Practice Podcast with Joe Sanok, session number 843.
I’m Joe Sanok, your host, and welcome to the Practice of the Practice Podcast. I am so glad that you are here today. Happy New Year. Hope things are kicking off in this first month that just got done and you’re reaching your big goals for the year, that you enjoyed all of the things we covered this last month. We talked about your money scripts, we talked about quarter by quarter planning, we talked about launching a supervision directory. We had a bunch of Ask the Experts to show you behind-the-scenes some of the things that we’re doing with Next Level practice and Group Practice Boss, our membership communities. We’re really excited that in March we’re going to be having another Level Up Week where we’re going to have different experts coming in. We’re going to be doing trainings for solo practices and group practices. We’re going to have more details on that coming out soon and can’t wait for that. It’s going to be really, really exciting.
But today I’m going to be talking about a question that I get quite often, and actually it was Ashley, one of our consultants here at Practice of the Practice, that said there’s a lot of discussion going on in our membership communities about how much should an owner get paid, like what’s your take on it? So I actually sketched out a bunch of interesting just numbers, interesting to me. Numbers are interesting because it points in a lot of different directions. Quick side note, I’ve been learning a lot about infinity. I was watching that Netflix documentary about Infinity and have a much better appreciation for calculus and just the nuances of the universe. Side note on numbers that that’s a really interesting show that’s out there.
Anyway it was actually Ashley that said, “What’s your take on this, because some people do profit first, other people do different methods?” So I’m going to walk through a few different thoughts in regards to Profit First, in regards to paying your staff and running through actual numbers. I actually took a picture of this and put it on our Instagram account over at Practice of the Practice on Instagram, so you should see that picture within there. I know I did it as a story but then also did it as a post as well. If you’re in our membership communities in Circle, which is where we have all of our conversations, you’ll see the full video that I did about these numbers. If you’re in Next Level Practice, Group Practice Launch, or Group Practice Boss you have access to that within our communities. Make sure that you go check that out so you can follow along.
Let’s start with the Profit First Method. A lot of people use Mike Michalowicz’s Profit First, the idea being that the typical business will do all of their operations. They will do all of their costs and then the owner might get some profit at the end. And Mike flips that and says, well, why don’t we pay the profit off of the gross first right at the beginning and then we’ll just make sure the operations align after that, which in some situations make sense. I think when you look at businesses that have employees or businesses in a lot of ways that makes sense. Where it tends to break down or at least need some adjustment is when you have a lot of percentage based staff because it can falsely inflate the amount of money you have.
So say you bring in $200,000, but you know $150k of that was contractors that you’re paying 50% of, really that’s not even money that you see. So we’re going to actually look at some of those numbers. First, what is profit first? The idea is that depending on the level of income coming into a business, the gross amount that the owner takes their profit, that they have different accounts that they automatically do. Typically that’s around 15% depending on how much money’s coming in and what level you’re at, that every single month that 5, 10, 15% is going into a profit account and once or twice a year you might take a draw from that or take part of it or all of it. The idea is that sometimes when we have a lot of money coming in or more money than we’re used to, there’s this thing called lifestyle creep where you maybe were bootstrapping it a while ago, but then you’re making an extra couple thousand dollars a month and then you start spending more and you actually aren’t getting any wealthier because you’re spending a higher percentage because you’re making a higher percentage.
So this is meant to combat that it’s in a safer account that you don’t really see very often, that you’re not worrying about or thinking, oh that’s my money. You haven’t already allocated what you would buy with that money. Now I think there’s a lot of great things about it because then you’re also allocating for your taxes automatically, allocating for your operations, your payroll, all of those things have different accounts that you’re going into. So with Profit First, if we’re looking at that 0 to $250K gross coming in, what Profit First teaches is that you should have about 5% of that going to profit. So at the upper end of $250k, that would be that $12,500 is going into a profit account in a year, so that would be about a thousand bucks a month or so.
That 50% of that gross should be going to owners pay, so that would be about $125K and that would make up 55% of the gross amount that’s coming into the business and then 45% of that would be going towards operations and taxes. So that’d be $137,500 that would be going into that operations and tax accounts. So that would be 0 to $250 with profit first. When you’re at the $250 to $500, and I’m going to do just the upper end of each of these, you want about 10% profit and so that’s going to be $50K, so $50,000 that year going into your profit account, 35% is going to be going into the owner’s pay. So that’s going to be about $175K and then not about, I mean that would be 35% of $500k and then 55% going towards operations and tax, so $225K. So you’d have 45% of the gross amount that came in going towards your profit account or going into your owner’s pay.
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Now we want to look at the half a million to a million business, so at the million dollar mark, you’re going to want about 15% going into the profit, so it’d be $150K, so over 10 grand a month if it’s going into that profit account. Then only 20% is going into the owner’s pay, so that’d be $200K. So when you’re at a $200K business, just in regards to owner’s pay not profit, you’re making $125K and then when you have a million dollar business, you’re making $200K as the owner’s pay. So not a huge jump, but when we look at also adding in profit there as well, if you’re adding in profit that’s $350K a year or 35% of that million dollars gross and then 55% would go towards that operations and taxes, so $350K going towards that.
That’s profit first which has a lot of really positive benefits to it but let’s look at when you have a percentage of your staff. Typically the rule of thumb that I follow is the amount that you want to take is about 45% of the net. So if you bring in $100,000 gross that you’re taking away $45,000 of that and taking that home and the other $55K goes towards taxes, the business, things like that. But let’s walk through the different phases so that 0 to a $100 in your, in solo practice. So if you’re at $100K total, so that’s not what you’re taking home $100K total comes into the business. Typically you’ll see about 30% or so going towards expenses, 15% to 20% depending on your tax bracket going towards taxes and then the owner pay being about 50%.
Now if you’re in different states, if you have different write-offs, if you have a partner that is filing, if you have kids, there’s obviously lots of different tax situations out there. So the tax numbers I’m using are based on Mike Michalowicz and other accountants and my own personal experience but you always want to check with your own tax and accounting professional. So that would mean then that you’re taking home about $50k from that $100K business. Now in the $100K to $250, that’s a group practice again, the owner brings in $100K. So in all these, I’m having the owner work as hard throughout as doing solo practice. Still bringing the same amount but $150K came in through the group, which means that that money came in but a lot’s going to go back out.
So if you have a 50/50 split, which I’m going to basis on a 50/50 split, non-employees or employees that get a split now this is really makes the case for why you should have W2s, especially as you start to grow in scale because then you can offer benefits and things like that at a much lower rate rather than giving them that 50/50 split. The $75K of that would be going right back to those clinicians. Now you wouldn’t, if their contractors will be doing payroll taxes or any of those things, they would just be responsible for that. So then of that $75K that’s left, if you had 10% go to operating 15% for taxes that’s going to be a total of about $18,750 that’s going towards that operating in taxes, which means that $56,250 of that $75K would be going to the owner.
Now we already covered a lot in that first $100K that that owner brought in because there’s a lot of fixed costs oftentimes, there’s, if you’re paying for rent, if you’re paying for EHRs. These things that don’t really scale with the number of clients someone sees, they’re just fixed costs. So your website for example, it’s going to cost the same whether you have one clinician or 20. So that’s why the operating when we see that next $75K is significantly lower than maybe our 30% we see at the beginning. So in that situation, the owner is getting a total between their own $50K and then the $56,250 where they’re then getting $106,250, which is 42.5% of the total gross profits whereas in that $100 to $250 with the profit first you’re getting 55% in that model.
So it’s a little bit lower but then let’s look at the $250 to $500K. So in this situation, the owner still is bringing in $100K of that $500, $400K comes in through the group. If we’re again giving a 50/50 split to the clinicians, they’re getting $200K of that. So there’s $200K left over for the business and profits. So if we look at operations and taxes, say we do 25%, give us ourselves a little bit more because as you are scaling to have a $500K business, you’re going to need more behind-the-scenes staff. You’re going to need maybe some upgrade and some services, maybe some more robust IT support. So give me a little more of that, so that would be 25% of $200K, that would be $50,000 for that operations and taxes. Then if we look at the owner then taking $150, that would be between that $150 and then the $50,000 that they brought in from their $100K, $200K. So that would be 40% of the gross whereas when we’re at $500K with profit first it would be 45% or $225,000. Still a little bit less, but we have a different model. It’s not just a whole bunch of employees in some of these types of group practices.
Then the last one, when we look at your million-dollar practice and the owner still brings in $100K, which actually at this point to say, well why are you working so hard to bring in just $100K when you have a million-dollar practice? At this point, you might want to challenge that idea that you have to keep practicing quite as much and even at the $500K level to just bring in that extra $50K. So then $900K of that comes in through the group. Again, we keep the 50/50 model. Not saying that’s the best model, but I’d rather be really conservative as we talk about this because we could run the numbers for W2s and you would make significantly more money based on the US taxes and how all that would work with the average person. So the clinicians get $450,000 and so then that would mean half of that stays in the business of $450. So 25% going to operations and taxes, so $112,500 going into that, which leaves that $337,500 for that owner plus their $50,000 is 387,500 or 38.75% is getting paid to that person, which actually is more than what Profit First says at the million-dollar business level, which would be 35%.
So you may want to look at the gross, but also if you have a group practice, you may want to look at that net after you pay your clinicians if they’re getting a percent. If you’re doing the W2 model these numbers definitely will shift and change where you have some very clear fixed costs where these individuals get paid $100,000 or $120,000 and they’re doing 25, 30 sessions a week. That may actually end up being a much lower percent than that 50/50 split. Those nuances though, for the sake of a podcast can get complicated. Not that what I just covered wasn’t somewhat complicated, but wanted to make sure that you had some of those numbers. Again, if you’re in our membership communities you can look within Circle and see the video that I made about this and also see the images there.
Yeah, we’re doing all sorts of things coming up. We are going to be opening up our membership communities again in March, so make sure you stay tuned. We’re going to have some open houses the week before that opens. We haven’t done that in the past so on day one if you’re like, I want to jump into Next Level Practice, I’m doing a solo practice this year, or I have a solo practice, all right, like I’m ready to go. Maybe you and some friends do it together. If you have a group practice or you want to start a group practice, we’re going to have open houses specifically around that for the week before all of that opens up just so that if you have questions, you can dive in on day one because we are going to have limited spots in those. We’ve been doing that because we want to make sure that we can really serve you well, help you get to that next level, get you into those small groups, those cohorts, those live trainings. We’ve got some amazing experts coming up throughout 2023 that you get to just hang out with. So pretty amazing stuff.
If you’re looking for free trainings, over at pillarsofpractice.com, we have some free trainings over there to help you level up before you ever give us a dime. We want you to be able to really strengthen and thrive in private practice even if you’re just listening to the podcast and doing our free stuff. We have so many free things that we give you, whether it’s checklists or videos over at pillarsofpractice.com. You can sign up for that if you have a solo practice or you have a group practice over at pillarsofpractice.com.
Thank you so much for letting me into your ears and into your brain. Have an amazing day. I’ll talk to you soon.
Special thanks to the band Silence is Sexy for your intro music.
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