Being an entrepreneur is a dream come true for many people. However, figuring out how much to pay yourself as a business owner can be challenging. It’s important to consider how much other similar entrepreneurs are getting paid and what your living expenses require. It would help if you also decided whether you want to take a regular salary or reinvest the profits in your company.
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Creating a Salary Policy
Once you have established a base salary, it is important to weigh this against your company’s cash flow. You want to ensure that your net income is sufficient to cover all operating expenses, debt payments and fixed costs. You can use a percentage of gross revenue as a guide, but you should use a more holistic method. For example, calculate your open market value based on your skillset and then pay yourself that amount. Then, you can take a bonus corresponding to your company’s profit each quarter.
Another option is to consider your business structure. If you have an S corporation, you can report your earnings as personal income; however, you might pay yourself a low salary and still be eligible for a large payout when you sell the business. Finally, you should also seek advice from a mentor or other experienced entrepreneurs. They can give you an idea of what to expect based on their experience and provide valuable insight into how to set your salary. It’s also a good way to network and get to know others in your industry. Ultimately, concerning how to pay yourself as a business owner, it is about getting the best return on your investment.
Tracking Your Income and Expenses
It’s important to look at your business expenses and income regularly. Start by writing down your business costs and separating them into fixed and variable expenses. Fixed payments include things like rent, utilities and insurance. Next, calculate your average monthly net income over six months. This number will give you a good idea of whether or not your business is profitable enough to pay yourself. If your business still needs to make a profit, then it may not be time to consider a salary for yourself. However, if you don’t see a lot of variation in expenses and your book profits are consistent, you should consider a salary.
Once you’ve calculated your average monthly net income, you can determine how much to save for a salary. It’s important to set your savings goals in order of priority. Think about your essential needs and what you are committed to protecting. Start with the lower numbers on your list and work up to your owner access number (the amount you need to live).
You’ll also want to keep in mind how you will be taxed. If you are paying yourself a salary, you must withhold and report it as income for tax purposes. However, if you use an owner’s draw method, you will not be required to withhold taxes.
Negotiating a Salary
One of the most gratifying things about being an entrepreneur is seeing your hard work turn into real money. It can feel magical to watch your profits build up in the bank and then be distributed for the good of your business. This feeling can also be a great motivator to keep you focused and hit your company goals. If you haven’t already, set up a separate checking account for your business and begin tracking your income and expenses. It will help you avoid mixing personal and business funds and give you a clear picture of your company’s earnings. Once you have a number in mind, start looking at comparable paid jobs in your area and consider your needs. If your owner access number exceeds what you need, figure out how to allocate the excess funds. Once you’ve figured out your number, it’s time to get negotiating! Remember to be confident in your ask and present your case. Focus on the return you bring to the company by highlighting your accomplishments, and include any additional non-financial perks that may help your case even more. It will show the other person that you’re worth what you’re asking for.
Setting a Salary
Entrepreneurship is a risky and challenging venture. Bringing your business to fruition requires much labor, sweat, and tears. You want to ensure you are compensated fairly for all your time investing in your company. Setting a salary is one way to do this. But the amount you choose to pay yourself will depend on some things, including your finances, the size of your company, and its sector. It’s important to research what other companies in your industry are paying their executives. It will give you a baseline to work from. You also need to determine what type of structure your business will have. An S corporation or LLC offers the owner more security than a sole proprietorship, a straightforward business ownership structure. Once you have determined the type of structure, it’s important to set a salary from the beginning to help you maintain accurate financial records.
Taking too much out of the business for your salary can cause financial imbalances. After accounting for taxes, payroll and fixed expenses, building your paycheck out of profits is important. If your business’s earnings exceed your personal needs, consider reallocating the excess funds. For example, you might put the excess into your retirement account or use it for other business expenses.