Setting your own salary: from payoff to premiums
If you own a small business, how do you pay yourself? Do you take home a pre-determined salary, or maybe a percentage of the profits? What if your business is not yet profitable? It's important to have a plan in place, especially when you're just starting out, otherwise you might find yourself collecting whatever's left after the bills are paid, or nothing at all.
There are a few things you should consider when deciding what to pay yourself:
- Growth — When your business is growing, it needs cash flow, and you don't want to interfere with that too much. You can start off small, taking home a minimal amount each month, for example, and then pay yourself greater amounts over time, as the business becomes more established and profitable.
- Ownership — You are at the helm of your business, and the time you spend, along with the risk you take, has value. If your venture does well, you get the rewards, but you will also absorb the loss if it does not. Reading about wages and payroll, and studying current labour and employment data data can help you decide what a fair wage for your work might be, relative to that of your employees.
- Financials — Paying yourself a salary gives a more realistic financial picture of the business for investors. If your salary is not included on the balance sheet, it can look like the business is doing better financially than it is. If you are just starting out, and can't afford to draw a salary, or if you have other income to support yourself, you can reinvest the money in the business after “paying yourself” on paper, so that those earnings are properly identified as part of the expenses of running the business.
As a sole proprietorship or a partnership, the income you receive is considered to be personal income for tax purposes. However, if you register as a corporation, you have other options for paying yourself, like wages, management fees, and dividends. Learn more about these options by reading about the forms of business structure.
Because there are so many things to consider, you may want help managing your finances. You can seek professional advice from an accountant, financial planner or tax lawyer. Be realistic, but don't be afraid to reward yourself. A bit of sacrifice early on may allow you to enjoy greater success in the future.
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