July 27, 2011

As an entrepreneur, one of the toughest questions you will face is what salary you should pay yourself. Most people grapple with this, even if it is just at the beginning when they are a fledgling startup. How much you decide to pay yourself can make a big difference in everything from getting your personal bills paid to keeping the company afloat. So getting it right should be a priority!

When it comes to determining how much to pay yourself, there are several schools of thought and ways you can do it. Before deciding on which one works best for you, first consider the ideas.

Here are some tips for paying yourself from your own business:

Pay yourself first

Many entrepreneurs end up paying all their creditors and bills and they overlook giving themselves a paycheck. While your idea may sound good in theory, to let the business keep it all can be disastrous. Try imagining how long you can go without a paycheck...if you are like most of us, not long at all. So give yourself a paycheck, even if it is just one that will cover your minimum bills to live at first. You can always give yourself a raise later, but you have to live, so take enough to get your bills paid.

The hidden benefit is that by paying yourself first, you will be automatically more critical off all the bills you are incurring (since the money isn’t sitting in the business bank account like it used to be).

Pick a percentage

A lot of entrepreneurs struggle in determining what kind of income they should take. I have found that once a company gets past the $1 million mark in revenue threshold, most companies can afford to pay its owner(s) 15 percent of gross revenue. This is not a magical number, so you will need to find what works best for you. For example, companies doing less then a million can often pay their owners a much greater percentage since the owner is filling the roles of employees who they would normally need to hire (and pay).

The key is knowing your personal pay will fluctuate. Over time, as the business grows, your percentage will drop—a small piece of a bigger pie, in effect. Just know it will always be in line with the amount of money your business is making, therefore keeping your company fiscally healthy.

Choose comparables

Another way to determine how much to pay yourself is to investigate comparable positions in your geographic. If you pay yourself close to what others make you will not raise any IRS eyebrows and should keep everyone happy.

When it comes to getting paid from your business, there are a variety of factors that are going to come into play. You will need to give some thought to each of these to come to the final determination. Such things as whether or not your company is making money yet, how much it is making and what you need to survive.

As a side note, if your business is not making any money, or enough money, for you to take a salary, you need to ask yourself why that is. What is it that you need to do in order to bring in more sales so that you can at least get your bills paid? While many entrepreneurs go into business with a cushion to fall back on, it is best if you don’t have to take advantage of using all that money. So put your efforts toward determining a game plan that will get you on the right track to making sales, so you can take a salary.

There are a lot of variables that will help to determine the salary you should take. If, after considering the ideas above and factors involved you are still not sure about how much salary you should be taking, speak with your accountant. Being familiar with your accounting history, they should be able to help you determine a comfortable salary. Your salary from your business is an important issue that can’t be ignored, so the sooner you get it figured out, the better.

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Mike Michalowicz, Article, salary, accounting, financial management