As a business owner, you work hard. You spend hours every day bringing clients in the door, training your employees, creating new services, and even paying the bills. Since you are spending so much time on your business, I am sure you want to see a paycheck at the end of the week just like your employees do. After all, a nice pat on the back from yourself is not going to pay your personal bills!
Now, I know it can be difficult to pay yourself, especially if your business is just starting out and is not making a lot of money. However, over time, your business will start thriving and you will want to have a salary in place for yourself.
But what should that salary be? How do you know what is a fair amount to be paying yourself?
Consider These 5 Things When Setting Your Own Salary
1. Pay for Competitors in Your Position
I would like you to begin by considering how much your competitors in your position are currently making. And then, if you were to do this same job for another company, what would you like your salary to be??
It is best to have the answers to these questions, so you know exactly what you should be earning. Most business owners who skip answering these questions only give themselves a salary of 50% – 75% of what they should be making.
2. Taxes
Your own personal taxes cannot be used as a business expense deduction. That means you need to make sure your salary is high enough to cover the taxes you must pay each year. As a business owner, you will pay more than 30% in taxes, which is more than 3 months worth of work. If you want to ensure you have enough money to pay for your living expenses, you must raise your salary from the beginning.
3. Retirement Plans
As a business owner, no one else is going to be funding your retirement. There will be no company matching and no money put into an account on your behalf. That means you must earn a high enough salary to add some of that money into a retirement account for your future.
Yes, social security is currently out there for retirees, but you shouldn’t count on that program as your only retirement income. You must set aside as much money as you can if you want to live comfortably in the future. Unless of course, you want to work for the rest of your life!
4. Benefits
Benefits are part of being an employee, which you are one, even as the business owner. When you are creating your own salary, you must include all of the benefits you give to your employees. Think about vacation days, bonuses, health insurance, and even a health savings plan.
5. Profit
Every day, you are taking risks with the business you have built from the ground up. These risks can take over your life, as you juggle everything to come up with solutions and so much more. Since you are spending more time working on your business and tackling these risks head-on, you must be prepared to compensate yourself accordingly.
The best compensation is allowing yourself to take a portion of your business’s profits. While you may not want to take a percentage of monthly profits, it makes sense to do a quarterly withdrawal.
It is important to note that while the profits are part of your salary, those profits should not make up the bulk of it. Instead, you should think of your profit-earning as a bonus. For example, if you want a salary of $150,000 each year and take $10,000 in profits every 3 months, you would have an income of $190,000 at the end of the year with both of those items.
Setting your own salary can be difficult, but it is a necessary part of being a business owner. In the beginning, you may not be able to bring in the salary you desire. If that happens, you must make sure that your smaller salary is not due to your pricing of services being too low. As long as you are pricing your services properly, you should be bringing in a higher salary in no time at all.
Are you struggling with setting your salary? Do you need a little help with other accounting aspects of your business? Contact me and let’s schedule a time to talk today!