Deciding how much to pay yourself can be surprisingly tricky. Answering these questions will help small business owners find the right number.
Being your own boss comes with perks and challenges. Deciding how much to pay yourself falls into both categories: You have the flexibility and the responsibility of deciding just how much is enough.
How do you walk the line between taking enough for your personal expenses and savings, without overburdening your business? The answer will be different for every business owner, but here are some important questions to consider as you decide.
How Much Are You Worth?
It’s a good idea to find a ballpark number that represents your earning capacity based on your position and experience. Do your research, small business owners need to know what their labor is worth, even if it’s executive labor.
If you retire or sell the business, someone else will need to step into your role, and that will be much easier if your salary is already part of the company’s financial picture. Working with an HR consultant or career counselor cold help.
How Much Can Your Business Afford?
Of course, your ideal salary might be too high. How do you know for sure? Start by looking at your net profit (revenue minus cost of goods and operating expenses). That’s where your paycheck will come from. But first, you need to set money aside for taxes, emergencies, and reinvestment. Then you can use whatever is left to pay yourself.
When you do the math, you might realize your paycheck is discouraging. The great news is that you are in complete control. You have the freedom and ability to adjust your business as necessary to get your personal income where you want it to be.
What About Retirement?
Every small business owner should be saving for retirement. The amount you’re able to save can depend on how you pay yourself. When determining the owner salary amount, it is important to consider the type of retirement plan in place, so as not to limit the amount of that tax-deductible contribution. For example, if the owner has a SEP IRA, only 25% of his or her compensation can be contributed, so a low salary could be limiting for this contribution.
By Ivy Lamb
Fivenson Studios is based in Ann Arbor, Michigan, our graphic design team specializes in logo and web page design, as well as marketing campaigns for social and print media. From flyers and brochures to targeted landing pages, we aim to bring your company into the spotlight and reach a greater range of potential customers.