In the infant stage of any business, your salary basically consists of what you earn in sales, minus your costs and taxes. Most businesses start out as a sole proprietorship with no employees and very little business overhead. However, as a company grows, many business owners choose to take on employees or enter a partnership, which ultimately complicates things when payday comes for a business owner.
So how do you “pay the boss” when the boss is you?
Because so much depends on how profitable your business is at the time (which often fluctuates throughout the year), there is no magic formula on setting your own salary. Financially savvy business owners may not see a lot of increase in their own bank accounts at first because they simply pay themselves what is left over after payroll, expenses, and operating costs. While their actual take-home pay may lack in the beginning stages, a successful business with strategic small business bookkeeping will grow over time and profits will increase.
When your business starts to show consistent profit from month to month, you should then be able to set a salary based on a percentage of those profits. Most businesses cannot predict their profits for the year ahead of time. However, after you have been in business for a few years, you can use those profits to review and make predictions about the future. Use your business costs, taxes, and planned investments to determine a reasonable salary for yourself. Most small business owners limit their salary to 50% of the profits.
If you depend on a set amount of money each month, you may choose to research the industry and set yourself a salary in accordance with those standards. The US Small Business Administration offers great comparison charts for salaries across all occupations and may be useful in helping you set a yearly salary and making adjustments over time.
As your business grows, surprisingly, setting or adjusting your own salary can become even more complicated. You’ll want to avoid overpaying yourself and raising red flags with the IRS, but you are also entitled to an increased salary as your profits increase. An accountant or financial consultant can help you determine a reasonable salary based on your company’s growth and financial circumstances.
While entrepreneurship is perhaps one of the greatest freedoms we have as Americans, it also requires a certain level of flexibility. When funds are low, your employees will still expect the same pay. It is you that will take the cut. However, as profits increase, the business owner will likely see the most advantage. If you keep your focus on the long-term growth of your business, having a paycheck that fluctuates depending on how the company is doing can have lasting advantages.
Visit more posts in our Payroll 101 series: