Your company is a business entity that exists to make a profit. But when you run the day-to-day business of your company, send out invoices, and create marketing material, you are acting as an employee for your company, not as an alter-ego of the business entity itself. Stop confusing yourself with the company you own – and pay yourself a fair wage.
Determine Your Salary
Determining your salary is not difficult. The internet is full of websites that will give you quality data in a few minutes, including Pay scale and the National Compensation Survey from the Bureau of Labor Statistics.
If you are conducting business on a full-time basis and handling marketing and CEO duties in the early morning hours, assigning yourself a fair wage will bring clarity to your dual roles as both owner and employee. Your salary should reflect compensation for your duties.
Pay yourself on a regular payroll cycle, just like you do for the rest of your team if you have other employees besides yourself. While you are at it, set aside personal taxes just like an employer would do if you were working for them.
By assigning yourself a fair wage you bring clarity to your dual roles as both an owner and as an employee. Your accountant will also appreciate the additional accurate data when preparing financial reports.
Adding Substance to Your Accounting Reports
Ideally, your accountant provides you with monthly financial reports that include a profit and loss and cash flow statement. If you do not thoroughly understand what these reports mean, you need to ask some questions of your accountant. This data can help you make the best business decisions for your company.
It is important to know that these financial reports are only as good as the information you have provided your accountant. As a service business, the most important data to track is the cost of your labor and the revenue your labor generates. If you are not paying yourself a competitive wage, you render your data meaningless. In most cases, the money your firm spends on employees should be the largest expense. If you do not pay yourself a fair wage, you will not be able to see if your employees are making your firm money. Even worse, you will think your firm is generating a profit when it is really losing money.
Taking Distributions Instead of a Wage Is Irresponsible
Your company needs to protect itself against slow cycles as well as make sure there are reserves for taxes at the end of the year. It will also need to retain profits to periodically invest in marketing, equipment, or real estate. Only after assuring the health of your company should you consider taking dividends.
Taking dividends based on an inflated “net profit” number is irresponsible. In some cases, business owners will “take dividends” to minimize company payroll taxes. Not paying yourself a salary and electing only to collect distributions puts you at risk for an unreasonable wage audit with the IRS. Which can be far costlier than paying the proper payroll taxes.
If You Cannot Afford Yourself, Go Work Somewhere Else
Few companies are generating substantial revenue on their first day of business. There will almost always be a period before your revenue grows to cover the cost of you. Technology, office sharing, or working out of your home have helped many startups deal with expenses. However, if your company has been operating for more than 18–24 months and it still cannot pay you a fair wage for your services, something is wrong.
It is possible that your business problem is insufficient revenue. Which is to be expected if your business is new. However, whether a new business or a seasonal slump, if your work load is light, you should have plenty of time to get out there and market yourself.
The hard fact is if you are spending too much on staff, you may need to let somebody go. Nobody likes the thought of having to fire an employee, but do not consider cutting your own pay so you can keep excess staff.
When you wear two hats you are responsible to both your business half as well as your employee half. Your business half needs to make sure the company stays healthy so it can provide you a return every year. This requires keeping accurate data to support sound business decisions. Similarly, your employee self needs to demand an honest, fair wage for the work you do. You lead your team, head up your marketing, and function as CEO of your company. If your business cannot support you, you need to cut support staff to meet your payroll. Make smart decisions and pay yourself like you would any other employee.