A Guide on Setting Your Own Salary when Running Your Own Business
When it comes to setting your salary as an entrepreneur, it’s often a number that is both complex and exciting. Although paying yourself a salary is highly rewarding, some business owners don’t actually enjoy the reward that comes with a steady income flow. Instead, most business owners often get frustrated by constantly worrying about what they should pay themselves as salary.
And then they have to try and figure out how to divide up the money generated from the business between the business and their personal bank accounts. Fortunately, you can pull yourself out of the business owner salary quagmire.
Avoid Guessing when Setting your Salary
Of course, the idea of setting your own salary is quite thrilling for anyone, but many small business owners will tell you that the reality is a bit more complicated. It is always wise to only pay yourself a salary out of the profits generated by the business – not the revenues you have raked in. When you start to see loads of money flowing into the business, this is not a leeway for you to pay yourself any amount that you feel you deserve. Before you decide to carve up your cut, it’s essential that you take into account important deductions like fixed costs, overheads, payroll, and taxes from the revenues your business is generating.
Good accounting software can be really handy when you want to calculate how much your business can afford to pay you. Good software also helps you to monitor all the expenses as well as measure profits instead of turnover or revenues. Overall, the amount you will pay yourself will ultimately depend on factors like your location, industry, profits generated, and the amount you wish to earn. Besides these factors, there are a couple of important things you need to keep in mind to help you come up with a reasonable amount.
Don’t Rate yourself too Low
If you’re just starting out as a business, there’re chances that you might fail to record a profit in the first year of operation. Now, this doesn’t necessarily mean that you shouldn’t take your cut since it doesn’t make economic sense for you to enforce strict austerity measures in your business if you’re going to suffer financial and emotional problems. Always remember that matters of personal finance are often a major cause of anxiety and stress, which can be very detrimental when it comes to making sound business decisions.
If you make the mistake of undervaluing your efforts and time in the business, you can easily become disillusioned and lose focus on your goals and business objectives. That’s why you must pay yourself enough to sustain a comfortable life without any worries.
Include Yourself in the Regular Payroll
Many inexperienced business owners have the tendency of dipping into the business coffers as and when they need money. This is something you should always avoid at all costs. Instead, you need to set up an elaborate system of paying yourself as well as your employees on regular intervals and stick to the schedule you have set up. You might want to consider using payroll software to help you plan and execute this effectively.
Additionally, this is something you need to incorporate into your business right from the beginning, perhaps with a gradual increment as the business gradually expands. This will help to ensure you get accustomed to the amount you get each payment period, and you don’t get the temptation of taking out huge lump sums randomly. It also creates a favorable impression on your employees as most of them find regular payments more convenient and acceptable compared to occasional huge payments. The government will also be more acceptable to such a regular plan as it doesn’t raise questions about how you’re paying taxes.
Ensure the Pay You’re Taking is ‘Reasonable’
Of course, you need to pay yourself a reasonable amount of compensation as the business owner. However, what is reasonable will usually depend on your location. A reasonable amount is usually considered as an amount that the government expects the business owner to take out from the business. It depends on the amount of turnover and profits, the market or industry sector, as well as the size of your business.
You can also talk to other business owners in your industry to find out how much they normally take out of their businesses to cater for their own salaries and the salaries of their employees.
Take into Consideration the Business’s Legal Structure
There’re instances when the amount you can take out as your salary will be dictated by the legal structure of the industry you’re operating in. If, for example, you’re operating a sole proprietor, you’re normally at will to take out whatever amount you like because you’re not answerable to any shareholders.
However, other types of businesses like partnerships and incorporated businesses are guided by certain legal principles that determine how much you get on a regular basis like other employees. These rules will usually vary depending on the country you’re in, so confirm with your accountant prior to making any decisions.
Stay Up-to-date with Your Taxes
Once you’ve decided the amount you will pay yourself as salary, you need to think about the best way to do it while remaining tax compliant. There’s no standard approach since tax laws differ depending on the jurisdiction you’re in. Moreover, tax allowances and rates will differ depending on the legal structure of your enterprise.
In order to ensure tax compliance and efficiency, you may consider several approaches including taking a straight salary, balancing your salary with the dividend payments, taking payments in terms of stock options, taking both a salary and an annual bonus, and creating a business contract to receive payment later.
Keep Tabs on Expenses, benefits and Deductions
Aside from the salary you pay yourself, you need to consider other financial benefits of running your own business. Things like medical insurance pension contributions are some of the most important to consider. These contributions can make a significant difference on your financial situation as a business owner since they come with certain legit advantages.
Other important expenses you should keep in mind include mortgage interest payments, expenditure on capital equipment, and car expenses. Remember that expenses like family, personal or living expenses cannot be included as business expenses.
Investing for Growth
If your business is recording growth and you plan to expand it in the future, it is wise to reinvest some of your profits towards your growth objectives. Keep in mind that the money you withdraw from the business and it doesn’t relate to the business is money you can’t use to invest in business growth. In fact, the government is more likely to tax the money you withdraw from the business and the true value of the finances you retain in the business will be even greater.
The more you reinvest in the company or business, the greater your chances of growing the business. That means you can be in a better financial position to pay yourself a bigger salary in the future.