Every entrepreneur knows that to run a business, you need to be a jack of all trades. But while many business owners know how to tackle sales, marketing, finance and business development, most battle with the fundamental question of what they should pay themselves.
There’s typically a push and pull when it comes to take-home salary – there’s pressure to keep money inside the business for growth, but you also need to live and potentially support a family. Many owners work hard for their success and feel they should reap the financial benefits of building a burgeoning operation, but that could lead to cash flow problems within the business. On the other hand, taking too little can lead to burnout and stress from trying to make ends meet at home.
According to a survey from accounting software company Pilot, 46% of business owners pay themselves less than US$100,000 per year, and 5% take no salary. The average founder salary was US$114,000.
So, what should you pay yourself? There’s no one answer, and every founder will treat their business and value their work differently, but there are some ways to get a better handle on how much you should be taking home.
Step 1: Examine your personal life
Start by taking a look at your personal life since that’s what your dollars are going to ultimately fund. Figure out how much you need to live on. Creating a budget can help, too. Having some spending guidelines will make it easier to pull out only what you need, but it will also make it easier to reduce personal expenses if you need to keep more money in the corporation.
Step 2: Determine what you’re worth
You’ll never find a number large enough to make up for all the middle-of-the-night panic attacks, hair-pulling stresses and never-ending thinking that come with owning a business, but you can try to put a price on your day-to-day activities. Say you own a small marketing agency – take a look at salary-listing websites such as Glassdoor.ca or the Government of Canada’s Job Bank to see what a CEO or senior director at other marketing agencies makes. Maybe you own a medical device business and you’re mostly selling products – what would a high-level salesperson at a larger operation take home? Also, talk to other company founders (many are happy to chat) about what they pay themselves. It’s not perfect, but it’s a place to start.
Step 3: Understand tax implications
If you own a corporation, determining what to pay yourself goes hand in hand with how you pay yourself – and your ultimate tax bill. In Canada, corporations are taxed at a lower rate than individuals, especially if you’re drawing enough to be in the highest tax bracket. If so, budget roughly 50% for your personal tax obligations with respect to any money you remove as a salary. Think carefully about how you withdraw money from the corporation, as there are differences between withdrawing money as a salary and as dividends. For instance, dividends can be taxed at a lower rate, although they are not deductible to your corporation, while only withdrawals taken as a salary give you Registered Retirement Savings Plan contribution room. Most importantly, speak to a financial advisor and a tax professional as a part of this process.
Step 4: Find a number that works – and then tweak
Since there’s no one number every owner should pay themselves, after doing your research, talking to other owners, crunching your tax obligations and developing a budget, you’ll need to find a figure that works for you and your business. The good news? Since you’re your own boss, it’s easy to ask for a raise. If you have a great year, you might take a little more out of the company. If revenues increase by 50% and you feel you can sustain them at that new level, you could potentially increase your salary on a more regular basis. The goal is no different than any salaried employee – work hard, grow the company and benefit financially in its success.
