How much should you take in compensation?
Set a salary as a percentage of profits
Assess your small business’ past performance to find a profit number to set as a benchmark. After you have that number, factor in business costs, taxes, and future growth plans. Then, from there, determine what an appropriate percentage of that figure would be as your tentative salary. The SBA reports that most small businesses limit their salary percentage to 50 percent of profits.
Determine your salary based on expenses
If you use this method, your salary depends on your personal living expenses. First, calculate all your expenses — from rent to groceries to transportation. Include everything like payments on credit cards, personal taxes, and entertainment costs. After you’ve come up with a comprehensive list of your expenses, divide the total number by 12 to determine the monthly salary you need to receive to keep you from dipping into your personal savings or relying on credit cards. This will show the minimum monthly salary you’ll need to stay afloat while growing your small business.
Startup salary calculation
If you are still in startup mode and have no profit history, review your own personal costs. What do you need to support a frugal, startup lifestyle? Look at housing, transportation, food, entertainment, etc. Consider postponing expenses for anything above your living costs until you start turning a profit.
Check out the data
The SBA maintains a database of income statistics. Information includes earnings by occupation and education, income statistics and results from a national compensation survey. Not only will this data help determine your own salary, but you’ll also discover if the salaries you are paying your employees in your industry are fair.
Seek expert advice
It’s a best practice to work with your accountant or a bookkeeper to determine the best method to pay yourself a reasonable salary. Here’s an article to help you find a financial professional, if needed: How to Find a Small Business Accountant.
The number one reason most people want to become their own boss is the freedom, satisfaction, and flexibility it offers them. However, if you’re not getting the compensation you need – and deserve – you might find yourself unhappy. This can result in a poor work environment and jeopardize future business growth. So, take your well-deserved compensation so you can successfully move forward and feel good about your entrepreneurial journey.