Small business owners have long been advised from refraining from taking a salary in the early days of building a business. Every dime should be put into growing the business in order to more rapidly reach a point where money is pouring in. But for most people, foregoing a salary for any amount of time is impossible. There are bills to pay and family members relying on that income. The good news is, it’s possible to grow a business while also taking a salary.
The toughest part of setting a small business budget is determining just how much you should set aside for yourself. Here are a few guidelines to help you pay yourself in the early years.
Percentage of Profits
One of the best ways you can pay yourself without feeling bad about it is to set yourself up to take a percentage of the profits. When money is rolling in, you’ll have income going into your personal bank account, as well. When you have a bad month or two, you can rely on your savings. You’ll likely find that knowing that your own livelihood depends on the business you bring in each month motivates you to keep going.
The question is, what percentage should you charge? Many business owners limit their salaries to 50 percent of profits, but you that doesn’t mean you have to set it that high. Remember that the more you take, the less money you’ll have going into your business bank accounts. This could leave you short of funds when it comes time to purchase furniture or pay suppliers.
Some businesses have enough money coming in each month to comfortably take a salary. The question then becomes how much of a salary you should take. You could pull down the same salary you received when you worked for someone else, but that may not be the best option to grow your business. You could also look up industry rates for someone in your position, perhaps commanding the same salary that peers in your industry are getting.
Paying yourself a salary has an added benefit: you’ll satisfy the IRS’s requirements. This is especially true once you’ve incorporated your business. Taking a salary shows that you’re running a business rather than pursuing a hobby. Of course, if your business is losing money each year, whether you take a salary or not will be irrelevant. For that reason, it’s important to keep your salary as low as you can possibly afford.
If you’re working with a professional accountant, that person will likely be able to advise you on just how much you can afford to take as a salary. An accountant can monitor your monthly cash flow and project how much you’ll bring in during the coming months. This will help you know just how much your budget can withstand based on the money you’re projected to bring in each month.
Accountants also have knowledge of the latest tax laws. This expertise will help you determine exactly what you need to do to satisfy IRS requirements. You’ll be able to show a salary for end-of-year tax preparation purposes while also keeping your business financially solvent throughout the year.
One final way entrepreneurs set their salaries is by figuring out their basic worth and paying based on that. This is set with the understanding that as a business grows and performs well, the business owner will increase this amount. The average starting salary for a small business owner falls between $34,000 and $75,000, according to a 2010 survey by PayScale. That salary has grown to more than $100,000 once a small business has been in place for more than a decade.
As you decide your basic worth, however, make sure you’re comparing small business owner salaries for your own area. Cost of living can dramatically impact salaries for business owners, with those living in big cities often requiring a much higher salary than someone who lives in a small, more rural area. You should be able to determine from online salary sites how much you should make for your area of the country.
Whatever course of action you choose, you should put it in place and make a point to follow it on a regular basis. Moving money from your business to your personal account whenever you need to pay a bill will get you into trouble quickly. At the end of the year, you should be able to show what you made each month on paper and you should also be able to set a plan for next year’s salary, following the best course of action for your own situation.