Being a business owner has many perks as well as challenges. Something that falls into both categories is how to pay yourself as a business owner. It’s a privilege to design your own paycheck, but deciding how much to pay yourself can also be a burden. Finding the right balance between paying yourself enough but also prioritizing the wellbeing of your business can be tough, so here are several tips to make the process easier.
Decide How Much You’re Worth
Reach out to other business owners within your industry or simply search the internet; try to estimate a ballpark number that represents your position’s earning capacity combined with the experience you have. An example would be Kevin Systrom, founder of Instagram, asking Mark Zuckerburg roughly what he earned from Facebook. You should also research how much your labor is worth even if it is only executive labor. A small business owner should consider anything they do that contributes to their business as labor, the same way you would pay an employee as much as they are worth to your business.
If you want to be 100% certain about the number of both, speaking to an HR consultant or a career counselor should put you at ease. It’s very important to make sure you have financial regularity so that you aren’t having to make this decision monthly – which can become stressful – and so that you don’t ring any alarms with tax offices.
Decide What Your Business Can Afford
Ideally, as a business owner, you could earn a lot more money than you could by working for someone else. However, after calculating your net profit (which is revenue minus the cost of goods and operating services) you might find that your salary is a little less than you hoped for. As a small business owner, it's important to know that at first as revenue will be slow in growth, so will your net profit. For this reason, the next step is incredibly important for the longevity of your business.
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Create a business Savings Plan
With the unpredictable nature of owning a business, it’s never a bad idea to have extra funds readily available to save the day. What a business savings plan consists of is completely up to you, depending on what you are going to prioritize over the coming months and the stage your company is in. If you plan on making a major investment into your business, such as moving into new offices or a new product launch this will likely impact your personal salary.
- Typical things that a business would usually set money aside for would include:-
- New hires
- Equipment purchases
- Product development
- Checking account cushion
- Website redesign
- Training programs
- Insurance policies (such as General Liability or BOP)
- Emergency funds
Did any stand out to you?
As important as they can all be, it makes sense that you don’t want to put all your profit into savings, especially as a small business. However, it would be wise to choose a few that stand out as imperative for your growth and begin to think about answers to questions such as:
How much are you looking to save for the project?
By when would you like to have that specific amount?
How much do you need to save monthly to achieve that goal?
The amount that has to be saved should also be deducted from your net profit before setting your monthly salary. This should leave you with the final amount that you can ultimately decide to give to yourself as the sole proprietor. Although there is one more step in deciding how to pay yourself as a business owner that you should take into consideration.
Are You Saving For Retirement?
When starting a business, saving for retirement will probably be the last thing on your mind, especially when you think about how much it could take off your salary. However, CNBC statistics found that 1 in 3 Americans has less $5,000 in their retirement savings, which is not enough to live on during your golden years. Luckily there are ways you can make it easier to save for such a long term goal such as automating the percentage you would like to save every month, whether you choose to do it as a direct deposit into a personal savings account or into a retirement savings account such as a 401(k) – it is completely up to you. The more you pay yourself the more you can put into your retirement savings – which is why it’s such an important factor in setting your salary.
Be sure to contact a tax professional to help you with expertise on navigating through your options. It could help you out with your retirement plan, as well as paying taxes, which is not something you want to get wrong!
When NOT to Pay Yourself
As a business owner, it can be incredibly tempting to pay yourself every penny possible from your efforts. However, there may be seasons when you won’t be guaranteed payment and to avoid as many pitfalls as possible it’s best to not pay yourself in these particular circumstances:
When your business is going through a tough time financially, it’s best to not pay yourself for the time being. if anything should be sacrificed for a while it’s your salary.
In addition, if you’re business is going through such a tough time that your employees aren’t being paid then you shouldn’t be taking money out either. You’re a team after all, and if they discover that you are still getting paid while they aren’t they’ll lose morale and, equally as important, respect for you.
When you owe a lot of money, large paychecks should not be deposited into your account. Creditors will not be too impressed if your bank account is incredibly large when there are invoices or loans to be paid.
Remember that as your business entity grows so will your salary, so it is perfectly okay if your salary at first isn’t what you hoped. Following these steps while deciding how to pay yourself as a business owner will allow you to give your business structure, as well as longevity so that you can eventually start receiving the paycheck you had long envisioned.