How Much Should You Pay Yourself as a Business Owner?
Did you know that 15 percent of small business owners require a second job to make ends meet? Or that only a little over 51 percent of business owners pay themselves a salary? These statistics make it evident that many business owners aren’t paying themselves enough to sustain their lifestyles. Although running a business can be gratifying, it will lose its appeal if it doesn’t allow you to support yourself.
How Much is Enough?
Determining how much you should pay yourself can be tricky. You need to strike an astute balance between profits, overheads, and your personal expenses. Yet, a few simple tips can help you determine what you rightly deserve. In this post, we’ll explain how you can pay yourself a fair amount that will enable you to have a comfortable lifestyle, without putting your small business at risk.
Match Your Peers
The easiest way to fix your salary is to scout industry statistics and find out what a person of your age, academic qualifications, and skills typically earns. Of course, there will likely be a vast difference in pay between a person employed by a large corporation and a small or medium local enterprise. Regardless, researching how much people in your industry make will give you a fair idea about how much you should pay yourself.
Profits vs. Overheads
Next, you should calculate what your business’s overhead costs are. This can include monthly rent, telephone and Internet charges, utility bills, transportation costs, employee payroll, and other incremental expenses. Once you determine these consistent costs, consider an estimate of your what profits will be, so that you can decide on a fair salary for yourself.
As a business owner, you are liable to pay various taxes on the profits your business nets, as well as your personal income. Inquire with a tax consultant about your tax liabilities, both as a business owner and individual. The US Federal, state, and local tax systems provide tax exemptions for households, single persons, and married couples filing joint tax returns. Therefore, you need to consider how much to pay yourself based upon your tax liabilities.
To start your business, you might have invested at least some of your savings into the project. While paying yourself from business earnings, calculate the amount that you invested to start the company. In addition, you should add an interest based on regular bank rates. This amount should reflect the salary you pay yourself. Replenishing your savings is vital for your financial well-being now and in future!
Many business owners procrastinate when it comes to retirement, and assume that they’ll have time to deal with it later. Instead, you should calculate projected expenses for yourself and family post retirement, so that you can ensure that you save enough money. Once you do this, you should determine how this amount will affect your salary.
Project your Profits
Regardless of the size of your business, you should have projects about profits in the short and long term. You can alter these calculations later to either upscale or downgrade your personal income, based upon profitability of the business.
When giving salary increases and bonuses to employees based on performance, you should also reward yourself for your hard work. Making a wage plan will help you determine how much money you can allot to raises. Although it is important to save money and run a tight budget, don’t be afraid to increase your salary if your business can afford it.
Calculate the number of hours you invest daily in your business, and determine how much you would get paid by an employer for working that amount of time. Also, you might consider adding a small bonus in the future for extra efforts you make in growing your business.
Not Paying Yourself
Keeping yourself away from payroll of your own business is not advisable. It can harm you financially by means of taxation. Otherwise, you may end up drawing heavily from the profits that can adversely impact the business. Not paying yourself is fine only in limited circumstances:
- When the business is fledging and yet to make profits.
- If you are repaying large loans and don’t want to be charged interest payments.
- The business is seasonal and does not earn sales year-round.
As a business owner, it is understandable that you want to invest in your business’s future. Still, it is pivotal that you fairly compensate yourself. If you don’t pay yourself enough, your personal finances will suffer, and you’ll likely have significant stress. Hopefully, after reading this post, you understand how much you should pay yourself as a business owner!
Editorial Note: Any opinions, analyses, reviews or recommendations expressed in this article are those of the author's alone, and have not been reviewed, approved, or otherwise endorsed by any of these entities.