As your business grows, you may be thinking of cashing in a portion of its income. But before you increase your pay, you’ll need to ensure you can set a plan that will not only give you fair, predictable, sustainable compensation but will also be something your business can endure for the long term.
Let’s get started.
Does my business’s cash flow allow me to increase my pay?
One of the best ways to determine this is to ask yourself (or your accountant) five key questions:
- Is my business covering its expenses?
- Does my business have more than enough cash on hand to cover its tax obligations?
- Has my business been able to cover its debt payments?
- Does my business have a cushion of savings to cover emergencies?
- Does my business’s income comfortably exceed its obligations?
If you can answer yes to these points, you’ll likely have enough on hand to increase your pay.
What should I be paying myself?
Ask yourself another question before answering this one: What is the most you could claim as a salary without creating more debt for your business?
Your answer can help you set the absolute ceiling for your salary. However, it’s not necessarily the number you should commit to.
Provided that your ceiling could provide far more than a livable salary—one that covers all your personal costs and sets you up to experience some comforts—you’ll need to determine what’s reasonable and what your business can afford to pay you long term.
|Keep in mind that any salary you claim is money you can’t reinvest in the business to cover emerging costs or explore growth opportunities.
One strategy you can take is to determine what your time is worth. Many owners make this calculation by determining what they could make in a similar role within a similar business. If you’d like to follow this approach, you could research industry salary guidelines, geographic salary information, and job title payroll data. You could also talk with other business owners to learn how they set their pay structures.
Your research can help you set a reasonable hourly rate for your time. Multiply this rate by the number of hours you invest in your business each week (or by a standard number of working hours, usually 40) to model out your weekly salary. Then, you can compare this figure to the ceiling you set (the most you could withdraw from your business without creating more debt).
If the reasonable salary figure is considerably lower than your ceiling, commit to it. You can always increase it later as your business continues to grow.
|Gusto offers a calculator you can use to test possible salary options with the financial constraints of your business. This tool can help you experiment with different scenarios.
What if my ceiling is too low to cover my target salary (or a livable salary)?
If your target salary exceeds what your business can pay, you’ll need to take a different tack. Start by making sure your business can cover your current salary. Then, calculate the most you can withdraw as a salary. Try setting your number somewhere above what you’re receiving today but below the highest amount your business can afford to pay. You can plan to review your numbers in six months to see if you can afford another increase.
If a livable salary is still out of reach, don’t despair. Instead, look at the following two areas to see if you can make a livable salary possible:
- See if you can cut your personal expenses to work within the salary your business can offer today.
- Review your business expenses and trim some fat to free up cash.
Are there tax-smart ways to increase my pay?
Yes. Tax laws can help you choose options that will benefit you or your business in a given year. For example, rather than taking a straight, simple salary, you and a tax advisor could explore the following options:
- If you own stock in your business, you could pair a modest salary with dividend payments from your shares.
- You could pay yourself entirely through stock or stock options.
- You could award yourself carefully timed bonuses to create favorable tax scenarios.
Would you like to connect with an accountant who can help you with tax strategies? Use the Connect button below to get started.
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