To anyone who hasn’t owned a business, the idea of entrepreneurship looks romantic: you can come and go as you please and direct the activities of other people. In addition, of course, you’re rich! After all, you do own your own business.
But the life of a business owner isn’t that simple. In a recent roundtable meeting, a business owner commented that he had been holding off cashing his own payroll checks. He’d incurred substantial year-end expenses and didn’t want to deplete his cash reserves.
Other owners in my roundtables have mentioned that key employees or employees working a lot of overtime make more than they themselves make.
The question arose, how much should business owners pay themselves?
According to PayScale, the salary of a small business owner in the US ranges from $29,462 to $160,606 a year. Included in those numbers are bonuses, profit-sharing and commissions.
There’s no magic formula to determine how much to pay yourself, it’s an incredibly business-specific and location specific question that depends on a number of factors.
- If you were to hire someone else to do the job you’re doing now, what would you have to pay them?
- Consider the tax implications. Depending on the type of business entity there are pros and cons to taking a salary, a shareholder distribution or reinvesting in your business. Ask your accountant which method is best for you.
- How fast do you want to grow? If you’re taking more salary than you need, you may be forcing your company to take on added loans.
- What can you afford? How much or how little can you and your family reasonably live on? Sometimes a spouse brings home a salary, or you benefit from an inheritance or trust. But if you need to rely on income from your business, you need to accommodate for your family’s living expenses.
Deciding what to pay yourself is an emotional and a practical decision. It’s easy to get caught up in the idealism of entrepreneurship but what’s in the long-term best interest of your company? Keep that in mind and you’ll take home what’s fair for your business and yourself.
The road is easier together,