When running a small business, it is often difficult to choose a salary amount for yourself. While there is no magic formula to determine the perfect amount, there are a few key points to keep in mind.
What Should You Pay Yourself?
As a small business owner, it’s essential to focus more on reinvesting money into your own business than taking a larger salary, especially in the early years of your business. Pay yourself enough to cover your basic living expenses. Consider creating a personal balance sheet that lists the items you need to pay each month, and then add up these expenses. Once you determine exactly how much money you need to live comfortably, make that amount your salary.
Another option is to take a percentage of revenue or net profit, and increase that percentage as revenues grow. For example, perhaps you decide to take 10% of revenue as salary up to $500,000, then 15% after. If your business earned $700,000 this year, you would pay yourself:
*($500,000 x 10%) + (($700,000 – $500,000) x 15%) = $50,000 + $30,000 = $80,000
Salary vs. an Hourly Wage
When you run your own company, the notion of hourly wages evaporates. As a small business owner, you might work longer hours, so paying yourself by the hour can get pretty costly. On the other hand, if you need help running your business and decide to hire staff members, it might be more economical to pay them by the hour. Try to minimize your overhead as much as possible until your net profits increase. As your business begins to grow, you can slowly add people to your team and pay them fair wages.
As a small business owner, it’s important to stick to a budget. Make your salary part of your business budget to ensure you earn a fair wage and still have enough money to run and grow your operation. More than, 4.3 million customers use QuickBooks to help manage their small businesses. Join them today to help your business thrive for free.