Your Own Business--How Much To Pay Yourself

Most small business owners are challenged with the dilemma of determining their salary. As profits start to roll in, it can become complicated to figure out exactly how much you need to divide into a salary, and how much needs to be reinvested in the business. In cases where business partners and investors are involved, it's always important to be fair and share the earnings appropriately. Establishing guidelines on payout and compensation structures before operations begin is a good way of making sure everyone is aware of how much of the revenue they can truly claim. As a business owner, however, there is more flexibility in what may, and may not be, acceptable.

The IRS will review any dividends and compensation that you claim as income. Determining what this amount is, is essentially up to you; you'll want to prioritize payouts to employees, family members, and general expenses. After that, you can organize your finances to find the best plan for you and the business as it grows.

One good strategy is to simply delay compensation and wait until the business starts generating larger amounts of revenue before claiming a salary. This will help you do two important things:

1. You'll be able to take a larger compensation that is more in line with how well the business is doing at a later date
2. You can allocate funds more effectively for regular payroll salaries, expenses, and startup items

If you do this, you'll need to document all the stages of startup and provide proof that nothing was taken out; this will make sure the IRS doesn't think that you are receiving excessive compensation.

Another option is to take a loan from the business. This may help you cover your personal expenses, and you'll need to keep track of all paperwork to report it correctly during tax season. Since you will need a way to pay this back, it may not be the ideal option if you are not expecting revenue for over a year. Short-term loans will be a better option if you choose to pursue this avenue.

If you prefer a steady income from a paycheck, defining your role as an employee can help you gauge what a realistic amount will be. You can structure this for increases with periodic ‘raises' over the course of the year, or even with a commission structure based on profit growth. If you are a partner in the business, you'll need to first authorize the agreement will all parties involved.

Every startup business has a certain level of risk; you shouldn't expect to relay on business revenue for at least six to 12 months after operations begin, and even then, this can have its limits. Your savings or another job will cover your living expenses, and it's essential that you plan ahead for all personal expenses so you're not dependent on any business revenue immediately. Overcompensating yourself, even during the business upswing, can be detrimental in the long-term. Making sure you are progressively growing the business should be your top priority, and this may mean foregoing your own compensation for a period of time.

Many new business owners ignore the reality of projections and actual revenue during the first few years. Even the most lucrative enterprise may not offer a large revenue stream for the owner, and this can be a difficult challenge. Patience is essential, along with a progressive, realistic, and steady growth plan. Payout and compensation for your salary is an evolving process, and you can be a successful entrepreneur by choosing the best options for your situation.