There’s so much to prepare for and track on the financial side of your business. Yet one thing that’s easy to overlook is your salary.
Regardless of whether you’re selling goods or services, it’s not as simple as making a sale, then pocketing cash.
Instead, like other facets of your business, it’s best to approach your salary with some planning and thought. We’ll get you started with 6 considerations to help determine how much you should pay yourself.
FOLLOW YOUR BUSINESS STRUCTURE.
Depending on how you’ve set up your business—whether as an LLC or a corporation — will dictate the IRS owner compensation guidelines you should follow.
For example, if you’re working as a sole proprietor, you don’t have many financial guidelines to follow — but that also means you’re on the hook for any liability that may occur.
On the other end of the spectrum, if you’ve established your business as a corporation, you’ll need to operate a payroll and pay yourself (and any other employees) a salary. Profits are attributed to the business, not the entrepreneur. And, each year, you’ll need to file a corporate income tax return.
If you run an LLC, you’re more in the middle. You’ll already have a business bank account, so, once you determine your salary, you can simply pay yourself and deposit that money into your bank account. We’ll talk more in a moment about the importance of keeping your finances separate.
ESTABLISH A BASELINE.
Once you understand any salary or other financial requirements you’ll need to follow based on the type of business you run, the other key factor to determining your entrepreneurial salary is knowing how much you need to make.
If you haven’t already, make a list of your living expenses, including housing, utilities, other bills, food, insurance and transportation. That gives you a baseline of what you need to make to ensure your expenses are covered.
It’s not uncommon for entrepreneurs to forego paying themselves in the early days of their businesses. That’s a decision that each entrepreneur should make depending on key factors like cost of living, business revenue and, if applicable, start-up financing. If you know that starting a business is something you want to do, it’s a good idea to go ahead and start setting aside some money (if you haven’t already) that can help provide a cushion as your business gets up and running.
SET YOUR PAY GUIDELINES.
At some point, it’s likely you’ll have at least a few employees. Prepare for that milestone by establishing your business’s pay guidelines (and start by using them on yourself!)
Start by doing some market research on comparable salaries in your industry. Then, once you’ve established base salaries for your company’s positions, decide other factors like when and how you’ll give raises. It’s important to be thoughtful and fair when determining and adjusting compensation, which is why it helps to put at least a basic plan in place before you need it.
Plus, having pay guidelines in place can help protect your business, too. If you experience sudden success and your revenue increases accordingly, it’s easy to overpay yourself. There’s no doubt you deserve the money, but like anything else in business, it’s worthwhile to be deliberate and methodical about your decision-making, including your salary. That way, you don’t inadvertently shortchange your business or run into other potential problems.
KEEP YOUR PERSONAL AND BUSINESS FINANCES SEPARATE.
We can’t emphasize how important it is to open a business bank account and use that for any business-related expenses. Not only is it easier to compile the data you’ll need come tax time; you can also more easily monitor your company’s performance and more proactively approach challenges like a decline in revenue.
TALK TO AN ACCOUNTANT.
Don’t hesitate to run your salary plan by an accountant, especially as you’re getting started. Accountants are invaluable in helping you make sure you’re following all applicable tax-related guidelines and that you have the processes and systems in place to avoid costly mistakes.
FREELANCERS, THIS MEANS YOU!
Not everyone considers freelancers entrepreneurs, but we certainly do. And we understand how easy it is to collect payment for your work, then simply deposit it and not give it much thought. Some freelancers take the extra step of withholding applicable taxes from each payment, since w9 income isn’t taxed. Yet there’s no reason you shouldn’t follow the same steps listed above to determine your salary. Open a business bank account for yourself and make all of your deposits there, then pay yourself a biweekly or monthly salary. Track all of your business expenses so that you can qualify for applicable tax deductions. You might also want to talk to your accountant about shifting to quarterly estimated taxes, which you’ll pay based on the previous year’s earnings. You’re much less likely to get a nasty surprise come tax time if you’ve been proactively paying your taxes. Plus, understanding all of your business expenses like taxes will ensure you can pay those while also paying yourself.
If you find yourself overwhelmed and not sure how to approach your own salary, help is a click away. Register for our free Kauffman FastTrac course, which gives you all of the information you need to start your business. That includes setting realistic financial goals (like your salary) and determining your steps to profitability. Plus, the course is self-paced, so you can start any time.