Believe it or not, small business owners have a salary, too! But the only difference here is that they decide on the amount themselves. The only tricky thing here is determining how much to pay yourself when you own a small business.
It takes time for businesses to rake in profits, which is why most owners don’t usually take a salary during the early stages. There’s nothing wrong here as your business settles in. However, it is never recommended as a long-term approach.
To prevent any negative effects on your finances, paying yourself a salary is a must. Since this doesn’t have any definite guidelines, most business owners don’t have the slightest idea of what amount is considered appropriate.
Here are a few tips to help you determine your salary as a small business owner:
Start with the Net Income of Your Business
The net income of your business is its profits. It’s the amount that remains after you deduct the expenses from the revenue. Calculate your net monthly income first as this will help you determine how much salary you can pay yourself.
Most businesses have fluctuating monthly incomes. Some months may see more profits than others because of unexpected expenses or differences in revenue. Consider this when calculating the average net income per month over the latest period like six months.
If your business doesn’t show profitability yet, taking a salary might be too early. If it earns monthly money, you can get your salary from the net income.
Allot 30% for Taxes
You will also owe taxes on your business profits. Business taxes are complicated topics, and the amount to pay will depend on various factors. The general rule of thumb is to allot 30% of profits for taxes, which often works great for newer businesses. You can also work with an accountant or learn accounting yourself to get a more precise figure.
Never wait until your taxes are due before you determine how you will pay for them. Small business owners may face serious problems if they get behind on their taxes. If you are unable to make the necessary tax payments, you might need to borrow money or prepare a payment plan to do so, both of which are not ideal.
Remember that you also need to calculate tax liability and pay estimated taxes every quarter for your business. You will be facing a penalty if you don’t do so and you only pay your taxes after a year.
Divide the Residual Money
This is the point when you finally have the monthly income of your business after the taxes are accounted for. The rest will be yours to divide depending on how you want to.
A portion of this should be allotted for a reasonable salary you will pay yourself. The remaining will go to business savings to be used for future expenses. These may include additional employees, marketing campaigns, new equipment, training programs, and website updates.
Paying yourself might not be easy if you are just getting started but sooner or later, this is something you do for the benefit of both you and your small business.