How Much Should You Pay Yourself as a Small Business Owner?
Compensation is top of mind for entrepreneurs. BizBuySell recently surveyed entrepreneurs asking why they want to start a small business. Fifty two percent reported that they were seeking better income opportunities. A question we come across frequently on blogs and social media is “How much should I pay myself when running my small business?” Even the SBA doesn’t have definitive answer stating, “There is no magic formula for setting your salary because so much depends on the development stage of your business and how it’s doing.” Although that answer is vague, there are several ways you can approach salary that will help you feel comfortable about your paycheck.
Set a Salary as a Percentage of Profits
Look at your small business’ past performance to find a profit number to set as a benchmark. After you have that number, factor in business costs, taxes and future growth plans. Determine what an appropriate percentage of that figure would be as your tentative salary. The SBA reports that most small businesses limit their salary percentage to 50 percent of profits.
Determine Your Salary Based on Expenses
If you use this method, your salary depends on your personal living expenses. First, calculate all of your expenses – from rent to groceries to transportation. Include everything like payments on credit cards, personal taxes and entertainment costs. In the book Start Your Own Business, the authors list underestimating personal expenses as one of the biggest mistakes a new business owner can make. They caution that slipping into the red personally can cause your business to suffer as the stress of financial uncertainty can affect your ability to run your business efficiently. After you’ve come up with a comprehensive list of your expenses, divide by 12 to determine the monthly salary you need to receive to keep from using personal savings. You’ll now have the minimum monthly salary you’ll need to stay afloat while growing your small business.
Startup Salary Calculation
If you are still in startup mode and have no profit history, review your own personal costs. What do you need to support a frugal, startup lifestyle? Look at housing, transportation, food, entertainment, etc. Postpone expenses for anything above your living costs until you start turning a profit.
Check out the Data
The SBA maintains a database of income statistics. Information includes earnings by occupation and education, income statistics and results from a national compensation survey. Not only will this data help determine your own salary, you’ll learn if the salaries you are paying your employees are fair.
Seek Expert Advice
Even if you don’t have an accountant on the payroll, lots of help is available for small business owners. Organizations like as SCORE, the SBA’s Small Business Development Centers and Women’s Business Centers have experts on hand that can answer business questions and help in a variety of ways.
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