As the owner of a business, the size of your paycheck is up to your own discretion. Setting and scaling your salary to facilitate healthy business growth and a healthy lifestyle is an art and a science.
Your salary should be determined by many factors including: the amount you need in order to cover expenses, the amount your business can afford, your market worth, the amount needed to cover personal expenses, and a whole lot more.
Here we offer some tips on the best ways to pay yourself.
Consider your stage of development
First of all, much depends on the stage of development your business is in. If you’re through the initial startup phase, then you can start to take a percentage of your profits or set yourself a specified salary. Compensate yourself as soon as your business can afford to do so. If you’re still in the early startup phase, your paycheck may simply be what’s leftover after all your bills have been paid.
Pay yourself from profits
Many people confuse profits with revenue. Just because you have a lot of money coming into your business doesn’t necessarily mean you can pay yourself with it. You must take into account taxes, payroll, overhead, and your fixed costs. Choosing an accounting software to help you keep track of your expenses will make this process easier, and ultimately tell you the value of your profit. From here you can easily see if your business is making enough money to afford to pay you.
Create a list of all personal expenses
The first step in planning your salary is creating an exhaustive list of personal expenses. This list should include everything from rent and mortgage payments, to small line items like grocery store bills. The monthly amount you need to cover your personal expenses represents the minimum monthly salary you will need.
Determine your worth
Next, compute your market worth in one of two ways. The first method involves computing your open market value, which is what an employer would pay in today’s market based on your experience and skills. With the second method, you pay yourself according to comparable companies. Figure out what owners of companies with a similar size in a similar geographic region are paying themselves.
In order to take into consideration the risk your taking on by starting your own business, you can boost your market worth by 3% to 5%.
Consider how taxes and legal forms affect you
When you’re self employed, the legal form you operate under affects how the IRS views your tax status. They type of business entity you establish also affects your taxes, and thus how you pay yourself. If your’re business is a sole proprietorship or a partnership, the IRS considers all profits made from the business and personal income to be the same. For more information on how to pay yourself according to your business structure, check out IRS.gov.
Check out our free eBook: The Ultimate Guide to: Accounting For Startups for more information on how to handle your money and pay yourself a great salary!