Running a small business – how much should you pay yourself?

August 26th, 2016 Chase Stafford
Running a small business – how much should you pay yourself?

It’s the age-old question every small business owner faces – how much do I pay myself? Too much and your business may fail to thrive. Too little and you may struggle to survive. So how do you strike the balance and set your company up for success?

Most resolutions boil down to two lines of thought:

1. Pay yourself what you are worth.

The advantage of this approach is that it creates a realistic environment for your business’ operating expenses from the beginning. By paying yourself what you feel you deserve, you are not creating an unrealistic environment.

If you take this approach you’ll want to build your salary into your business plan so you have an accurate portrayal of how much capital you need on a monthly basis to survive.

Also, remember not to make the common mistake of confusing revenue with profit. Before you take out your salary, first take into account things like taxes, payroll, fixed costs and overhead. This is why a good accountant or reliable accounting software is so important. They will help you keep track of what’s coming in and what’s going out, which will allow you to quickly see whether your company is making enough money to afford to pay you.

2. Pay yourself the bare minimum.

The reasoning behind paying yourself just enough to get by is that it will minimize your overhead in order to decrease the amount of capital required to launch your company. Also, by reducing your overhead, you are able to reinvest some of your profits back into the business. You’re likely to be taxed on money you take out, so the real value of the money you keep in the company is even greater.

If you anticipate your business is going to grow (and we hope it does!), it may make sense to use some of your profits to help that growth. The more money you invest sensibly into your business, the more likely it is that your company will grow. And perhaps that way you can pay yourself more at a later date.

While the opinions on these two approaches differ, most people agree that paying yourself something is important. Here are some tips we’ve learned over the years while working with entrepreneurs:

  • Regardless of how much you choose to pay yourself, get into the habit of paying yourself on a monthly basis. If you take out big sums of money at irregular times, it may raise red flags at the tax office or lead to an audit of your company.
  • Personal money issues are a big cause of stress, and if you’re stressed then you won’t make good business decisions. At the very least, pay yourself enough money to live comfortably without worrying.
  • Build your salary into your business plan right from the start. That will allow you to plan for the amount of money you’ll receive and show your investors you’ve considered it thoughtfully. One thing you could consider is increasing your salary as your business succeeds.
  • Talk to your accountant about the tax ramifications of your salary. Depending on the type of company you have (LLC, corporation, etc.) you may want to adjust your salary based on tax benefits.

 

About the author

Chase Stafford is Vice President of Commercial Banking at MidWestOne Bank.

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