“I’m Worth It!” Deciding How Much to Pay Yourself
As a small business owner, you’re always the last one to get paid — after employees, suppliers, lenders, and everyone else who contributes to keeping your doors open. But that doesn’t mean you should never get paid!
After all, you need money to live, too. Struggling with your personal finances will only add to the stress of running a business, and may even affect your performance in both your professional and family life.
Here’s how to figure out when and how much to pay yourself.
Calculate a fair value.
Do some research into standard salaries for your industry and region. Check out:
• What your competitors are paying employees in a position similar to yours
• What salaries or hourly wages are being offered in the want ads
• What your current income works out to as an hourly rate
• How your current income compares to your own employees
There’s nothing to be gained by undervaluing yourself, either — unless your business is founded on the principle of having the lowest prices in town. Customers will value you at the same level that you value yourself. Those who want good quality expect to pay for it and will be loyal to the business that provides it. Those who want cheap prices will always be shopping around or trying to negotiate for a better deal.
Go over your personal budget to see how much money you absolutely need to live on without going deeper into debt each month. Are there places where you can trim expenses?
Find out your legal obligations.
The structure of your business may have a bearing on how you pay yourself. If it’s a sole proprietorship, you can do pretty much whatever you want, whenever it’s convenient.
On the other hand, a corporation is accountable to shareholders and must be able to demonstrate “reasonable compensation.” That’s why this type of business usually has the owner on the payroll, just like every other employee.
You also must keep records of payments to yourself for tax purposes — even (especially!) if you withdraw money from the business as the need arises rather than on a set schedule. Enter these transactions in your accounting software as they happen, and you’ll have less stress when faced with a tax filing or audit.
Decide on a payment structure.
Now that you have a number in mind for paying yourself a fair, livable wage, choose your payment strategy. Which one is right for you and your business will depend on your business structure, applicable tax laws, and cash flow situation. The possibilities include:
• Straight salary
Easiest to manage but not always the most tax-smart.
• Salary plus stock dividends
Dividends from the company stock you own are taxed at a lower rate than salary income, but make sure it’s legal in your location.
• Stock and stock options
Most tax-efficient way of paying yourself.
• Salary plus annual bonus
Could save on taxes in some circumstances.
• A business agreement to pay yourself later
If the business is short of money right now, but still needs to account for your salary.
When NOT to pay yourself.
It’s best not to take any money out of your business if it’s experiencing any of these financial situations.
• Employees haven’t been paid
This would affect staff morale, turnover, and productivity, likely leading to even further losses.
• Creditors haven’t been paid
This will damage supplier relationships and hinder your ability to obtain new credit.
• The business isn’t making a profit
Don’t take money straight out of revenues without first checking your profit and loss (P&L) statement.
If you’d like further advice and insight on setting a fair wage for yourself, tax implications and records, cash flow improvements, or understanding your P&L statements, just ask your expert Xendoo CPA team. We know you’re worth it!