With any luck, it’s the quality problem any fledgling business owner would like to have: you’re doing so well that you have money to spare.
Now, you wonder if it’s time to pay yourself a salary.
But just because it’s a high-quality problem doesn’t mean it’s not a genuinely important question. Whether to pay yourself a salary from your business’s coffers can be a dramatic decision that impacts your bottom line both personally and professionally.
Even trickier: no two business situations are alike, which is why there’s no easy answer. But look through these tips and see if you recognize your own situation among them:
Do You Have Enough Money?
The very first question you should ask is the most important. Can you afford yourself?
Many businesses have to get by in their early years because the founder is supported by other means — a spouse, family, friends — and the profit margin is so razor-thin that there’s no way you can take any money out without sacrificing the growth of the business itself.
According to Bloomberg, you should familiarize yourself with the process of “taking draws” from a company once you’re able to — even if those monthly draws are as small as $1,000 per month. Doing so will teach you how to handle this salary for tax purposes. In this case, you’re essentially training yourself for when you have more money, potentially more employees, and don’t want a surprise when it comes time to start paying your own salary.
But at some point, it all comes back to this basic question: do you have enough money to treat yourself like an employee?
Assessing Your Future Business Needs
It’s not enough to know what’s going on now in your business. What if you need more office space in the future? More inventory? More money for research or marketing?
If you’re considering paying yourself a salary, and you believe that the growth of your business will have to come out of that salary, then you’re probably going to pay yourself too much.
That’s the advantage of starting small, as Bloomberg noted above. Forbes’ Kelly Phillips Erb agrees, saying, “Don’t overextend yourself. Remember, you gotta eat. That fancy new office space can wait.”
If your business has enough financial wiggle room to make plans for growth and pay you a consistent salary, it’s time to consult the accountant and see how you can make it happen. If not, you might want to hold off and let your business grow some more.
Don’t Forget About Reinvesting
Yes, making sure that you have enough money to eat could be considered a reinvestment in yourself. And there’s nothing wrong with that.
But as your business grows, you should leave some money for building it up — truly reinvesting in the productive capacity of your enterprise. Without that reinvestment, you’re simply spinning your wheels.
There are a number of ways to reinvest, so if you haven’t done these already, they deserve your consideration:
-
Hiring an accountant. Making sense of expenses, taxes, income, the type of business you are — you need a degree to handle it all. Accountants have those degrees, and you don’t have to hire them as full-time employees. They can be considered a reinvestment because they often save you money in the long run.
-
Building up your productive capacity. This is the most obvious form of reinvestment. A burger restaurant that purchases a larger griddle can handle more customers and can make more money. What’s the “big griddle” in your business — and have you invested in one yet?
-
Marketing. Effective marketing is essentially a way to purchase more business, which keeps money flowing and builds up your business’s client base.
-
Logistics. Anything from purchasing a delivery truck to outfitting your office with better supplies counts as “logistics.” And good logistics help your business run smoothly.
If you haven’t reinvested your money building up the business from within, it may not yet be time to draw a salary for yourself.
Are You Profitable?
This question is so basic that most businesses forget to ask it. Are you profitable? If so, it might be time to start drawing money out from those profits — without completely erasing your ability to reinvest in the company itself.
Once your company is profitable, you have wiggle room. You can pay yourself and leave money left over for growth. It might not be much, but it can sometimes mean the difference between eating Ramen noodles and switching to a healthier alternative.
If your business has no profit, then it’s either breaking even or worse — it’s losing you money. Paying yourself from a losing business will only accelerate the rate at which it declines. It’s not pleasant news, but someone has to tell you. Until your business is profitable, it’s not ready to earn you any serious money.
It Depends on Your Corporate Entity
You may not be required to pay yourself a salary, but in some cases, you may have to do it simply to keep up with the way your organization is structured.
This is where the accountant comes in.
If you want a preview of what your accountant will tell you, however, then it’s worth going straight to the Internal Revenue Service website to learn the rules. In some corporate structures, officers will be required to take a salary — and that may end up referring to you.
Making the Leap to Salaried Work
For many business owners, the moment you start paying yourself is the turning point. It’s when you finally feel financially free — that your business is truly going to make it.
But unless required to by business and tax regulations, you should be wary of paying yourself too much or too quickly simply to make this milestone happen. In some cases, it’s better to keep reinvesting in your business so it can grow to a point where you can draw that salary and continue to grow. When you can do both — that’s when you know you’ve made it.