What to Pay
Yourself
It's your business. You
get paid what you want, right? Not quite. Here's what you need to take
into consideration before setting your salary.
December 11, 2003
There is no place where self-discipline
plays a more important role than in setting your own salary. As the
owner and founder, you can allocate as much or as little of the
company's profits as you want to your own paycheck. You can even decide
to go further. You can tell your accountant to cut you a check equal to
the entire month's sales. That will be a high-water mark for your
earnings, however, since draining that much cash will ensure that it is
your last month in business.
There are two groups of interested
parties in the decision about how much to pay yourself. First, you have
to do right by your partners (if any), employees, suppliers, creditors
and customers. If you take money out your company for yourself to the
extent that any of these parties are damaged, it could be a mistake.
But you also have to consider yourself
(and perhaps your spouse and your children), as well as any charitable
causes you support out of your earnings. These interested parties
deserve a fair cut of the bounty, too. You should get a decent return
on the labor and risk you have invested. Your family should, of course,
share in those benefits.
Complicating the issue is the fact that
there is no set amount an entrepreneur should earn. Strictly speaking,
it's all yours, or as much of it as you retain ownership of. Of course,
a board of directors, partners, other owners and lenders may also have
a say in this. Absent all limits, in a world where only you and your
company are involved in the decision, you have to choose between taking
money out to spend on yourself and your interests outside work, or
reinvesting it in the company, where it can power further growth. The
decision to take or reinvest profits is a highly personal one that
turns on the fulcrum where your interests and those of your business
coincide.
Other than taking a salary, there are
several ways you can get value out of your business. They are:
- Dividends. You can elect to pay
yourself any amount you want by declaring it a dividend.
- Paying family members. You can
hire family members and pay them just like regular employees (as long
as they're working just like regular employees.) This at least keeps
the money in the family.
- Fringe benefits. You may be able
to pay for country club memberships, company cars, luxury business
trips to popular destinations, and give yourself other attractive
perquisites—and have them treated as tax-deductible business expenses.
Just make sure you offer them to other employees as well.
- Delayed compensation. If you chose
to forgo compensation during your start-up phase, when cash was
critical, you can take larger compensation now without fear of being
accused by the IRS of taking excessive compensation—as long as you
carefully documented your delayed-compensation plan when you were
carrying it out.
- Don't forget loans. You may be
able to take a loan from your business as long as you document it in
writing, pay a market rate of interest, and have a definite schedule
for repaying it. Without those features, a loan between a business and
its owner may run afoul of the IRS.
One more note: Be careful about paying
yourself a very high salary and attempting to deduct it as a payroll
expense. The IRS tends to view such salaries as dividends, which could
mean you can't deduct your compensation as a business expense. Plus,
you'd have to pay corporate taxes on the dividend.
Excerpted from Growing
Your Business
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