Owning a small business requires you to make many decisions concerning your business on a regular basis. Deciding on when to take a salary is one of the “fun” decisions you get to make!
Today we’ll talk about taking a salary, but remember, this should be determined based on your personal situation. Depending on your legal entity, it may be best for you to be on the payroll, balance salary with dividend payments, take stock or stock options, or a combination of salary and annual bonus. Those things aside, let’s talk about salary!
As the business owner you need to pay yourself based on profits. Do not confuse revenue and profits! Take into account the fixed and variable costs, payroll, taxes, and overhead expenses. Having everything organized in accounting software is important to see where you stand. After determining your profit, think about how much you want your business to grow. As you’ll be taxed on the money you pay yourself, it makes sense to invest some of the profits back into the business first. This ensures your business will have the necessary means to achieve your goals and the payout to you, the owner, will be greater at a later date. Once you know your profit and how much you want to invest back in the company, you are at a great starting point to determine salary.
As you draw money out for a salary, plan to do it at a level that will grow with your business. Take a salary that you can live on and then increase it as your business grows. You’ll also want to take a salary at regular intervals. Think about it…you may raise some eyebrows and cause attention to yourself if you’re taking large sums at irregular times. This also will look bad to your employees. Speaking of employees, be sure they are paid before paying yourself! There’s no better way to create disgruntled employees than to not pay them and pay yourself.
In addition to the salary you pay yourself think of other (legal and legit) benefits that can be derived from your business. A few weeks ago I talked about retirement plans; that’s a great way to prepare for the future through your business. Additionally, medical and dental insurance for you and your family are business expenses that can be taken as a deduction. Be sure to read the fine print and make sure you qualify first!
Do you meet clients for lunch and coffee to discuss business? Meals and entertainment are 50% deductible so think of the business lunches as one less trip to the grocery store! Be sure to save your receipt and document who you were with and even what you discussed. Save these receipts in a folder and proudly hand them over in the event of an audit. If you’re driving for your business, check out the mileage deduction and if you qualify! Track your mileage and you can have your business write you a check for gas.
As with all of these deductions, make sure to read the fine print and be diligent about record keeping. Determining your salary can be a fun and overwhelming decision. Make sure it’s a decision based on accurate financial information. As always, if you need any help with your bookkeeping I’d love to hear from you!