If you’re a sole proprietor, your salary is essentially your annual earnings, minus business expenses and taxes. What’s left over is usually what the sole proprietor takes as an annual salary, according to the U.S. Small Business Administration (SBA)1.
However, as your business grows, as you hire employees, expand your service area, increase revenues, and become more profitable, determining your salary becomes more difficult to calculate. Market fluctuations and unforeseen expenditures make setting a salary a topic for discussion with your legal counsel and your business accountant.
What are some of your options?
Pay Yourself According To Regional Industry Standards
If your business is still in the start-up phase, you can pay yourself what’s left over after all business expenses have been paid, with your salary changing month to month based on seasonal changes in revenues, a new client, a new business site – a lot of variables must be weighed as a business moves to profitability.
Once your business starts to show sustained revenues, you can set a pre-determined amount to be paid as salary, or take a percentage of the business’ profits as salary. Once again, this is a decision that should be made after consultation with a tax expert.
Pay yourself according to industry standards, and where you live. The cost of living inNew York Citymay be much higher than the cost of living inReno. Pay yourself enough to enjoy the fruits of your labor, but be flexible, as well. You’re the owner, not an employee. Your focus should be on adding value to your business long-term. How big your monthly pay check should be is probably a secondary consideration.
Check Out the Competition
The SBA also recommends doing some research on what owners of similar companies, operating in the same business sphere, pay themselves. This can be a great way to determine a range of salaries for men and women in similar business positions.
One resource to review with your accountant is the Income Statistics section of the SBA website.2 These statistics provide the salary range of business owners across numerous industry and business sectors. Paying yourself an average salary for your position can simplify your calculations. Again, talk to an expert for the advice you need.
Compare Your Salary to Employee Salaries
As the business owner, you may feel uncomfortable taking a large salary while paying employees less, but there are times you’re working late after all employees have gone home for the day.
Some weeks, you may work 40 hours. Other weeks, you could put in 60 hours. When calculating fair compensation for yourself, consider the time you spend at work, the skills you have to grow a business, and the entrepreneurial drive it takes to build a new enterprise.
Your salary should take into account your time, your experience, investment of personal capital, and other factors that should be discussed with a knowledgeable accountant or tax attorney.
If you want to learn even more, contact the local branch of the Service Corps of Retired Executives (SCORE), your local business chamber, or other resources online or just around the corner. Nevadans can get assistance from the Nevada Small Business Development Center3, a state-wide outreach program of the University of Nevada, Reno, College of Business. With locations in communities across the state, its advisors can provide a wide variety of technical assistance.
As a business owner, setting a salary is a decision that should be considered with care, and with the expert advice of business finance professionals.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice.