Business Tips from SCORE: Don’t be the last man (or woman) out! 3 Important Tips on Paying Yourself

It’s not at all unusual to learn that a start-up business owner is not paying himself.  After all, there are so many costs in opening a business. You have no idea how the business will do so you preserve your funds to ensure you have enough available to fund your operating costs. Here are 3 important tips on paying yourself.

This shouldn’t last for an extended period because you are in business to make money. Knowing when (not if) you can pay yourself is an important financial question. As the business gets going, adding your compensation is an important factor in assessing the overall health of your company. If you don’t factor in pay for yourself, you are ignoring a significant cost that affects the business—that would be you. You won’t be able to make smart decisions on pricing, hiring employees or making capital investments.  And by the way, remember it is you who has brought value to the company. Get paid for it!

What’s involved?

1. When should I start paying myself? Once your revenue becomes more sustained, determine what the business can afford on a going basis. Don’t stress the business but  also don’t underpay yourself. You need to initiate a path where the business is sustainable for you.  Start small. Over time, increase the amount.
2. How do I get paid? If you are an S Corp, you must be on the payroll with a reasonable salary comparable to that of someone in a like position. You are an employee, paid on a regular schedule and you withhold  taxes from your paycheck. If you are not an S Corp (or C Corp), another option is to pay yourself using an Owner’s Draw (money that is available after operational expenses).  You don’t pay taxes upfront with a draw so it’s smart to set up a tax reserve fund to not be caught short at tax time. Set a schedule as to when you’ll take draws so you make payment a regular habit. There are other ways to take money out of your business but consult with your accountant to get the best advice.
3. Avoid the pitfalls. While we’re big advocates of owners paying themselves as soon as possible, we also see many making mistakes that can impact their income.
   1. Mixing personal and business expenses:  keep them separate. Do not use a business credit card for personal expenses.  Be sure to make the actual transfer of your compensation from your business account into your personal account. You don’t want to spend time reclassifying expenses.
   2. Proactively budget for taxes:  they don’t go away so set up a fund where you set aside funds to pay quarterly taxes.  Don’t risk not having the funds and being fined for non-payment.
   3. Regularly evaluate the financial situation of your business.  Be realistic as you increase in salary so that any steps you take are consistent with your ongoing goals. Look at your cash flow forecast to ensure you have funds for needed expenses.
   4. Be Knowledgeable. Understand how much you should/could be taking out of the business.  Research what other owners make in similar industries. Join networking groups to gain information and utilize outside studies like the Annual Pilot Study where they track the salaries of owners across the country.  It’s important that you fully understand how much you can earn from the business both short-term and long-term. Knowing your potential helps guide your decisions.

Related article: How to determine the value of your time

Need help with salary or have other business questions?  SCORE Cape Cod & the Islands provides free, confidential mentoring.  Contact us at capecodscore@verizon.net, at 508-775-4884 or on our website at www.capecod.score.org to set a meeting with our mentors.