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Salary: how much should I pay myself?

You started a business so you could have financial freedom, and you may have thought that the money your business makes is your money to spend as you wish. But this could be causing your business to flounder. There has to be a different way. A way where both your business and you manage to grow and achieve the goals you want. So how much money should you be paying yourself?

The benefits of working out your salary are:

  • You will have an accurate amount to put in your business plan which will make you aware of your running costs for your business when you start.
  • You will show potential investors and your staff that you are serious about your business and don’t treat it as a hobby.
  • The tax department won’t become suspicious of your business because you are not taking out large sums of money on an irregular basis from your business and if you do so they may ask to audit your business. 

With these benefits in mind, it should also be mentioned that there isn’t a one size fits all approach to working out how much you should get paid but there are four questions which you should consider.

1. Does my business have enough revenue?

You should consider whether your business is making enough revenue for you to be able to pay yourself a salary and consider what the projected revenue will be.

2. What do people with a similar amount of responsibility in your industry get paid?

Do some research on what people in your industry get paid. You can use PayScale to look for the potential salary of people in your industry.  When you have this figure it may seem to be out of your business’ budget especially if your business is a start-up but you should use this number as motivation to get your business to be a success.

3. What are your expenses?

You need to write down the basic expenses for your needs to survive. They could be your rent or mortgage, grocery, phone, internet, water and lights, and medical insurance. This should form the base of your salary and if your business turns a profit you could allocate a percentage of the profit to your salary and your employees’. By ensuring your salary covers your expenses, you will safeguard your personal finances. You should also discuss this amount with your significant other to see how much of the household expenses they expect you to pay.

4. How should you pay yourself?

There are two ways which entrepreneurs can pay themselves. They can pay themselves a regular salary like an employee or they can take an owner’s draw or do a combination of the two. Each method has pros and cons and should be discussed with your accountant to find the optimum method for you and your business.

With the answer to these four questions, you will be well on your way to making a respectable and achievable salary for you. You will be motivated to succeed so that you can receive your salary and your fellow employees and investors will respect you for the commit you have shown towards your business.

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