How to Pay Yourself When You Own a Business

Posted 2 years ago by Jesse Ness, 黑料门 Team

As听a听business owner, you have complete authority over your finances. You decide how much to听invest in听daily operations, how much to听spend on听marketing, and听even how much to听pay yourself.

But as听they say: with great power comes great responsibility.

Finding the听fine line between rewarding yourself and听investing in听your business can be听difficult. You want to听balance your business鈥檚 growth but also give yourself the听financial security needed to听make responsible decisions.

If听you鈥檝e ever struggled with figuring out when and听how to听pay yourself, this post will help you out.

Ways to听Pay Yourself

While a听monthly salary is听obviously a听widely accepted way to听pay yourself, there are a听number of听alternatives. As听with anything money related, each comes with its pros and听cons.

Monthly Salary

If听your business is听registered as听a听corporation (C-corp 辞谤听S-corp in听the听US), you can pay yourself a听monthly salary. You get a听fixed income each month from the听corporation鈥檚 profits. The exact amount is听decided by听shareholders.

In听some corporate structures (such as听an听S-corp in听the听USA), you are legally bound to听pay yourself a听salary, however small it听may be.

Pros:

Monthly salaries are predictable, stable, and听make f辞谤听easier accounting.
Getting a听salary means that you can invest in听retirement plans such as听a听辞谤听.

Cons:

Salaries are 100% taxable, so听this might increase your tax burden depending on听your country and听tax bracket.
In听some countries, you are liable to听create a听 with the听tax authority to听pay yourself.

Learn more: Registering Your Ecommerce Business: Sole Proprietorship, LLC 辞谤听Corporation?

Dividends

Apart from salaries, a听popular way to听pay yourself as听a听corporation is听through dividends. A听dividend is听essentially any听profit extracted from an听incorporated business after all its liabilities (including tax) have been taken care of.

Dividends can be听extracted as听many times and听in听as听large an听amount as听苍别肠别蝉蝉补谤测鈥攑谤辞惫颈诲别诲 it听is听approved by听all shareholders.

A听lot of听business owners prefer to听pay themselves small salaries and听then make up听f辞谤听it听by听regularly extracting dividends from the听company.

Pros:

Dividends are usually taxed at听a听lower rate than wages, so听you鈥檒l save on听taxes.
If听you pay yourself in听dividends, you might not be听liable to听pay f辞谤听mandatory government pension.
It听is听usually easier to听pay yourself in听诲颈惫颈诲别苍诲蝉鈥携辞耻 can write yourself a听check and听make a听record via a听director鈥檚 resolution (a听document describing an听action authorized by听the听board of听directors of听a听corporation.)

Cons:

Dividends don鈥檛 count as听聯personal income.聰 This might prevent you from investing in听accounts, like a听401k 辞谤听Canadian RRSP.

Owner鈥檚 Draw

If听your business is听registered as听a听proprietorship 辞谤听a听sole-member LLC, you can 聯draw聰 profits. This is听called the听聯owner鈥檚 draw.聰

Since the听proprietorship is听considered to听be听wholly owned by听you, you can draw as听much and听as听frequently as听you want. Drawing money from your business reduces your 聯capital account聰 (the amount you鈥檝e invested in听the听business).

Pros:

It鈥檚 very easy to听pay 测辞耻谤蝉别濒蹿鈥携辞耻 just have to听write a听check and听deposit it听into your personal account.
No听social security, Medicaid, federal, 辞谤听state taxes are taken on听draws. This does vary from country to听country.

Cons:

If听you pay yourself entirely via draws, you don鈥檛 have any听personal income on听paper. This can cause a听problem when applying f辞谤听mortgages 辞谤听personal loans.
Any money you take out is听taxed as听personal income. This can be听higher than corporate taxes in听some countries.

Most business owners prefer to听pay themselves via a听mix of听salary and听dividends/draws. A听regular salary ensures that you have a听consistent source of听income. Any additional profits you want to听extract can be听done via dividends 辞谤听draws.

Also, keep in听mind your country鈥檚 taxation structure. In听Canada, f辞谤听instance, if听the听business makes more than $500,000听in听profits, it听doesn鈥檛 meet the听聯Small Business Limit.聰 You鈥檒l get bumped to听a听higher tax bracket. Some business owners prefer to听pay themselves a听higher salary to听cut down profits below the听$500,000听limit.

As听laws differ from country to听country, you shouldn鈥檛 choose the听best way to听pay yourself just by听reading online articles. Make sure you consult a听trained accountant and听get professional legal advice to听avoid missing out on听important details.

How Much to听Pay Yourself

This brings us听to听the听reason f辞谤听this post: how much should you pay yourself? Your salary will depend on听a听number of听蹿补肠迟辞谤蝉鈥攊苍诲耻蝉迟谤测 norms, profitability, tax structures, etc.

Industry Norms

How much you鈥檒l pay yourself depends on听the听established norms in听your industry.

To听give you an听idea, the听median wage f辞谤听chief executives in听the听US听is听$179,520, according to听the听. Of听course, this figure is听skewed due to听a听large number of听overcompensated corporate CEOs, but it听gives you a听general idea of听how much a听founder/CEO makes.

However, when you look at听CEO salaries by听industry, you see that the听figures differ a听lot. For example, in听the听ecommerce industry, the听average salary f辞谤听a听CEO in听the听US听is听 a听year, while a听hospital CEO makes a听year on听average. That鈥檚 why it听makes sense to听research the听average compensation in听your industry.

Ask your friends and听acquaintances in听the听industry about their own compensation. Come up听with something similar (as long as听it听doesn鈥檛 impact profitability). And don鈥檛 be听afraid to听ask about salaries!

Your Personal Income Requirements

When you鈥檙e just starting your business, it听makes sense to听reinvest as听much of听the听profits into the听business as听possible. Even when you do听decide to听take a听salary, you should strive to听keep it听as听low as听possible to听avoid slowing down your business growth.

One way to听come up听with this figure is听to听do听a听close audit of听your personal expenses and听create a听personal balance sheet. Through a听budget, you should find the听minimum amount of听cash you need each month to听live. That amount should include:

Rent and听utilities
Groceries, fuel, dining out, etc.
Debts including existing loan and听credit card payments
Monthly, quarterly, and听annual payments such as听car insurance, medical insurance, etc.
Average monthly miscellaneous expenses.

Your salary should be听at听least 10% higher than all these expenses combined.

There are dozens of听personal balance spreadsheet templates available online, not to听mention personal finance apps and听online calculators. Most of听them are free!

So听don鈥檛 hesitate to听check out a听few to听find the听most convenient way of听maintaining your personal budget.

An听example of听a听budget planner worksheet (Source: )

Salaries at听Equivalent Positions

Another way of听figuring out your salary is听paying yourself an听income equivalent to听what a听person in听your position would typically make.

Look at听job openings and听 reports to听check average salaries f辞谤听employees with similar skills as听yours. Avoid comparing yourself to听C-suite executives at听large companies; their compensation is听usually inflated.

For example, here鈥檚 what Payscale says is听the听average income f辞谤听a听CEO. Note how CEOs make a听lot of听money through bonuses and听profit-sharing.

At听first, your business might not be听able to听handle a听CEO with a听$160,000听a听year salary. Instead, look at听managerial and听senior roles in听developing, marketing, designing, 辞谤听operations. Salaries in听these positions are reasonable yet competitive.

When calculating your own salary, add a听premium because your responsibilities will usually extend beyond a听typical employee鈥檚.

Your Business Legal Structure

As听we听explained earlier, different corporate structures offer different ways to听pay yourself. Tax rates also vary based on听how you鈥檙e incorporated.

Your business structure is听one of听the听major factors in听deciding how much you pay yourself. For example, if听you are incorporated as听an听S听辞谤听C-corp in听the听US, it听might be听more tax-efficient to听pay yourself a听small but reasonable salary, then take out more money through dividends.

The important thing to听note is听to听pay yourself legally. For example, in听the听US, outside of听a听proprietorship (where you can pay yourself via owner鈥檚 draw), you shouldn鈥檛 dip into the听business funds randomly. There should be听a听proper record of听any听money withdrawn from your business to听personal accounts (either via salary, bonus, 辞谤听dividend).

If听you don鈥檛 record when and听why you pay yourself through business funds, you risk an听Internal Revenue Service audit. This is听bad f辞谤听you, your business, and听your brand. Your customers can lose faith in听your business, and听you face a听lot of听expenses.

Consult an听accountant to听find the听most tax-efficient way to听pay yourself based on听your business鈥� legal structure.

Opportunity Costs

Any money you take out of听the听business has an听opportunity cost.

Opportunity cost is听the听loss of听other alternatives when one alternative is听chosen. If听you have any听existing opportunities f辞谤听your business, it听makes more sense to听maximize the听opportunity and听minimize your salary.

Consider an听example: you鈥檙e running a听successful Facebook ad听campaign. For every $1听you put into the听campaign, you make $1.5听产补肠办鈥攁 straight 50% profit.

Experienced ecommerce business owners know that such profitable campaigns are very rare. You want to听maximize the听returns by听putting all spare money into the听campaign.

Keep this in听mind when figuring out your salary. If听you spot any听current 辞谤听future opportunities, reduce your salary and听put that money into the听business instead.

Consider Your Salary Before You Start a听Business

Chances are, you worked a听job before starting your ecommerce business. Ideally, you want to听pay yourself at听least the听same amount as听your last job.

For example, suppose you were making $20/hour in听your last job. This would give you an听annual income of听$41,600听at听a听standard 52听weeks of听work (this is听S听in听the听equation below).

Add a听10% bonus to听this figure given your additional responsibilities as听a听business owner. Further, add inflation to听the听salary as听well. This will make financial planning easier.
Thus, with an听inflation of听5%, your salary would be:

S听+听(10% of听S)听+听(5% of听S)听=听$48,084; when S听=听$41,600.

Think of听this as听your replacement salary. This is听the听salary at听which you can replace your existing job.

To听Sum Up

Ideally, you should pay yourself a听salary only after you have sustainable, scalable profits. Once you decide to听pay yourself, choose the听most tax-efficient method as听per your corporate legal structure.

Consider industry norms, your past salary, and听the听salaries of听people with similar skills as听you. Make sure to听maximize any听existing opportunities before paying yourself.

What鈥檚 Next?

Now that you know how you are going to听pay yourself, it鈥檚 time to听answer another important question. How are you going to听get paid?

For online store owners, there are dozens of听ways to听accept payments online. However, the听ecommerce platform you use influences the听types of听online payment methods you can implement.

To听get the听most out of听your payment gateways, you need to听choose an听ecommerce platform integrated with many different payment methods. For example, 黑料门 by听Lightspeed supports over 100听payment providers.

When choosing a听payment method f辞谤听your online store, you can鈥檛 go听wrong with safe and听secure payment gateways. For example, Lightspeed Payments in听the听US听is听a听great choice. It听allows you to听accept payments in听your online store via all major credit and听debit cards, Google Pay, and听Apple Pay. Not to听mention, it听has competitive fees (2.9% +听$0.30听per transaction). Plus, no听hidden fees!

If听you run an听黑料门 store, you can sign up听f辞谤听Lightspeed Payments right from your 黑料门 control panel. There, you can manage payouts, see payment details, and听set up听refunds. .

Giving your online shoppers payment options that are both safe and听convenient is听one of听the听things that prevent abandoned carts. If听customers can鈥檛 find their preferred way of听payment in听your store, it鈥檚 likely they are going to听seek a听website with a听more convenient checkout. And when you lose customers, you lose 辫谤辞蹿颈迟鈥攁苍诲 your salary.

Not sure how to听pick payment methods f辞谤听your online store? Read this article on听how to听find the听best payment system.

听

About The Author

Jesse is the Marketing Manager at 黑料门 and has been in e-commerce and internet marketing since 2006. He has experience with PPC, SEO, conversion optimization and loves to work with entrepreneurs to make their dreams a reality.

黑料门

Ways to听Pay Yourself

Monthly Salary

Dividends

Owner鈥檚 Draw

How Much to听Pay Yourself

Industry Norms

Your Personal Income Requirements

Salaries at听Equivalent Positions

Your Business Legal Structure

Opportunity Costs

Consider Your Salary Before You Start a听Business

To听Sum Up

What鈥檚 Next?

Start selling on your website