Don’t Shortchange Yourself: Entrepreneur’s Pay
What should you pay yourself?
Being in business means taking a lot of risks, especially financially, and as an entrepreneur, you deserve to be rewarded for those risks. Your pay is just one of the many benefits of your self-employment. But it’s not like the pay you get as an employee, there is more to just picking a number for salary.
The two major ways entrepreneurs can take money from their businesses are through owner draws or by receiving a paycheck. If your business is incorporated, you’ll take a paycheck; if your business is a sole proprietorship or a partnership, you’ll take a draw. Again its important to know what entity type your business is
Here’s a list of five items to make sure you have covered in your pay:
- Reasonable Compensation.
If you were doing the same work for a company that hired you, what would your pay be? Are you making at least market equivalent or better? A lot of times, as entrepreneurs, we tend to focus only on this piece of our compensation when we set our pricing, and that’s a big mistake.
There are also tax implications of paying yourself too little (to avoid payroll taxes if you take a paycheck) or too much.
- Retirement plan
When you work for yourself, no one is going to fund your retirement for you. Although the Social Security program helps, it’s up to you to set additional money aside for a comfortable future when you can’t or don’t want to work anymore. 401k plans are easy to set up with your payroll and require little extra work. We love working with Guideline for retirement plans. They sync with our payroll and record all the information neatly in our QBO file.
Employees get vacations, health insurance, and bonuses; and you should too. This should be part of your compensation package as an entrepreneur, and there are many tax advantages as well. Find a good health insurance broker- one that understands the tax implications of setting up health insurance for an owner. They will help guide you to the best plans for your situation.
You need to cover taxes that will be incurred on your pay as well as your business profits. This includes:
- Normal withholding for federal income taxes, state and local income taxes, Medicare, and social security. If you receive a paycheck, these will be taken out of your paycheck, but they may not be enough because they don’t consider taxes on your profits. If you take a draw, you may not have withholding, but you will need to factor in self-employment taxes.
- Taxes on your profits. For sole proprietors, partnerships, LLCs, and S Corps, your taxes will be figured on the profits of your business when you complete your federal income taxes. They will “pass-through” from your business to your personal return. Don’t let this part surprise you!
- State business taxes. If your business does business in multiple states, you must file a tax return for each state. Many of them collect taxes based on flat corporate fees, the revenue you earned in that state, state payrolls, and/or the value of property owned in that state.
Check with your tax advisor so that there are no surprises in your tax bill for your business or your personal returns.
As an entrepreneur, you take extra risks when you own your own company, and you should be compensated accordingly. Your capital is tied up in your business and should be earning a good return in addition to your regular salary or draw. Making a profit is the goal for every business- if not you are setting yourself up for failure, because no profits mean you are not getting a return on your investment.
Your compensation should include all of the above components. If it doesn’t and you feel like you can’t afford to pay yourself that much, then your pricing might not be right and , you might have a volume problem, or your business model may need some adjusting.
It’s normal to take a smaller paycheck the first few years as the business is growing, but if you’re still doing it after several years or constantly have cash flow issues, then something may be wrong and you need to take a closer look at revenues and expenses.
If you’d like our help in this area of your business, please reach out and let us know.