One of the big questions that many business owners ask themselves is this:
How much should I pay myself?
Deciding how much you should pay yourself is a big decision. It’s part of what just about every business owner has to decide in order to strike a balance between what’s good for the business, and what’s good for you as a business owner.
Why You Should Pay Yourself
As a business owner, it can be tempting to put off giving yourself a salary. You might decide to wait until the business is profitable and you can return value to investors.
Maybe you want to reinvest most of the money in growing the business. Perhaps you are concerned about making sure your employees get their paychecks.
These are all important goals. However, you should also consider the importance of paying yourself as the founder and owner of your company. It’s a good idea to make sure you draw a salary:
- It can help you stay motivated to keep working for the business.
- Your time is valuable and you are working. You should be paid.
- Your personal finances need to be taken care of, and your family needs to be cared for.
Even if you have a life partner with a good job, and you feel like you don’t need to take a paycheck from your business, you should still pay yourself. You can set the money aside as an emergency fund if you like, but it’s still important to pay yourself. You never know when things will change in your personal situation.
What’s Fair for Payment?
The next step is trying to figure out what’s fair to pay yourself. You want to make sure you are adequately compensated for your efforts, but at the same time you want to make sure that you don’t send the wrong message.
If you are looking for investors, none of them wants to see you taking a huge salary and lavishing benefits on yourself. Instead, they want to see a measured approach. On top of that, if you are an ent
On top of that, if you are an entrepreneur with a startup, your employees might be working hard as well. You want to be fair to them, even as you pay yourself.
When you offer benefits, make sure that you are taking benefits in line with your employees.
If you are a profitable company, an article from the Wall Street Journal suggests this rule of thumb: Take 20% of the profits for your salary and reinvest 80% in the business.
This seems reasonably fair as well. It assumes that your employees are getting paid and have access to benefits, and it also assumes that you are making sure the business grows and remains profitable.
You can also consider a salary arrangement that puts you at 20% to 30% more than your average workers’ salaries. At this stage, you don’t want things to get out of hand, and you want to make sure the business still has money to grow.
Pass-Through Businesses
Of course, not every business has these challenges. If you have a pass-through business and you are the only employee, you can more easily determine what to pay yourself.
As a freelancer, all of my money comes back to me, aside from what I pay for contracted services. I don’t have salaried employees. I do like to take a portion of the income from my business and reinvest it things like paying a VA and making sure my sites are in tip-top shape.
However you decide to do it, make it a point to pay yourself as a business owner. It’s only fair, and it’ll ultimately be good for your bottom line.
