“How much should I pay myself each year?” is a question that startup clients often ask us when putting together their first-year financial projections for loan applications. The article 5 Tips for Setting Your Salary as Business Owner by Caron Beesley, contributor for the U.S. Small Business Administration, helps clarify the factors to be considered.
First realize, as the author states,“there is no magic formula.”If your business is a startup, then banks often like to see you take a percentage of what is left over after all operating costs and bills have been paid each month. For a business operating for several years, the salary should be set in accord with industry standards for your area.
Consulting with your accountant is a good idea prior to making any major financial changes in the business. There may be tax benefits if the owner is a salaried employee versus just a member of the LLC. Also, depending on your loan requirements, costs,and growth plans for the future, there may be better uses of the money.
Secondly, for existing businesses, look at a percentage benchmark. Commonly accepted is the 50-percent-of-net-profits calculation for each month.
You can also check around with other small business owners who do what you do, or seek the services of your area SBTDC to find out national industry standards. Use what you learn to justify a salary amount to your banker or accountant.
You don’t want to overpay yourself, but if you are working 20 hours more a week than one of your key employees, don’t be afraid to properly compensate yourself for this time investment.