When you’re sorting through your business expenses, you may find unexpected expenditures here and there. What you may not find is your own salary! According to the 2016 American Express OPEN Small Business Monitor, only 51% of business owners attribute a part of their business’s income as pay to themselves.1 How could half of business owners forget to pay their own salary? It’s not forgetfulness that is the problem — it’s bad bookkeeping.
It’s time you focused on your role in your small business — that includes accounting for your salary. You are the “who” of your business. Fill in the why, when, how and what to help guide you as you uncover your salary as an entrepreneur.
Misallocating your business’s income can lead to larger problems down the line. Without an accurate picture of how much your business is actually making, how will you know if you need to raise or lower prices, modify business hours, reduce or increase employee hours and more? In short, by ignoring your take home funds, you are potentially hindering the success of your business. It’s time you start giving credit where credit is due.
When your business is young, it may never seem like a good time to pay yourself. In the list of priorities, your salary is probably near the bottom, especially in the early years when you are still getting your footing. However, there certainly can be some benefits to paying yourself even a small amount from the beginning. Below is some basic information for your consideration, but you should always seek professional guidance from an experienced tax advisor or accountant for your specific situation.
First, there can be some tax benefits for those who file as a sole proprietor of their business. In other words, you could potentially have control over giving yourself a large tax break. Another good reason to pay yourself is for personal emotional benefits. When you own a business, the line between personal and professional finances can be blurred, so if you are struggling in either area, the emotions tend to blur as well. If you are stressed or worried, that could run into your business and affect progress.
In both of these cases, the sooner you resolve the problem, the better. So when should you start paying yourself? As soon as you can, given that you meet the following criteria:
- You are making more money than you are spending.
- You have consistently made more money than you’ve spent in the last six months.
- Your financial forecast looks stable.
Once you are in a good place to pay your salary, how much do you allocate? Obviously, the actual number will vary greatly from business to business. Here are some general principles to help guide you toward a proper amount:
- The higher your salary, the more taxes you will pay. Consider where you will fall on the tax brackets before committing to a certain number. Instead of paying yourself the entire sum, it may be beneficial to pay yourself a slightly lower salary and put the difference back into the company.
- Budget for the life you live, not the life you want. Many people struggle to live within their means, entrepreneurs and non-small-business owners alike. A good foundation for your salary is simply the cost you need to live. Calculate a specific number that includes housing, food, utilities, etc.
- Crosscheck your real day-to-day costs and whatever number you come up with as your cost of living. Examine the differences and recognize any holes. Do they need to be filled or is this an area where you can spend less?
The goal here is to create consistency, but as any small business owner knows, consistency and entrepreneurship do not always go hand in hand. There will be times when you must diverge from the plan to keep your business going, but at least this way you have a goal you can communicate to yourself and help get back on track after whatever crisis is averted.
1American Express OPEN Small Business Monitor. (April 27, 2016). Hiring plans on the rise but finding the right staff is the biggest challenge to growth since recession. Retrieved July 7, 2016, from http://about.americanexpress.com/news/pr/2016/finding-right-staff-big-challenge-to-growth.aspx