Setting your own salary can be one of the stickiest issues in starting your own company. You want (and need) to support yourself adequately, but at the same time you must avoid causing cash flow problems by over-estimating the amount available for payroll. Salary issues are affected by the type of company you’ve set up: a sole proprietor may simply keep a percentage of the profits, but a small business that has incorporated will need to look at a set salary, and also consider such issues as dividends, deferred compensation, and performance bonuses. When deciding how much to pay yourself and how to structure those payments, you may want to consider:
1. Your company’s financial situation – how much can the company afford to pay you?
2. Comparative salaries for similarly-sized businesses in your industry – how much is the average salary for equivalent positions?
3. Provisions for growth – if you budget conservatively for payroll and then achieve business success, what reward provisions are in place?
4. Retirement – do you have a pension plan or stock options?
5. Health benefits – can your company afford to acquire health insurance?
6. Perks – especially if your initial salary is modest, can the company provide other perks? A company car or cell phone may be a legitimate business expense.
Action Steps
The best contacts and resources to help you get it done
Assess your company’s financial situation
Your salary is academic if it’s more than the company can pay. On the other hand, if you run the company well, you deserve more money! The starting point for compensation decisions is a realistic forecast of how much money is available for payroll. Don’t forget to make provisions for performance bonuses or stock options where appropriate; set these policies in writing and decide what triggers these provisions in advance. Deferred compensation is one option; if you anticipate needing to plow most of your profits back into the business in the early stages, you can arrange to defer your salary until a certain time period or financial benchmark has been reached.
I recommend: The
Small Business Administration offers a downloadable spreadsheet for developing cash-flow projections; more are available from the
Small Business and Technology Development Center. Other financial analysis software tools are available from
BizWiz Consulting.
Look at the salaries of executives in similar positions
It’s good to know the salaries of others who are in similar positions so that you have a benchmark. When doing a salary comparison, take industry, region, and size of business into account. If there are no exact matches, consider which factors are most influential in your circumstances. For instance, is your company best compared to similarly-sized businesses in your region even if they are in different fields, or does industry matter more than location?
I recommend: See
Salary.com and
SalaryExpert.com for compensation comparison tools.
Consider your salary as one element in your compensation package
There’s more to compensation than salary. What benefits can your company afford to offer? Do you have a pension plan or health benefits? Be sure that you’re not subsidizing your business, also – if you use your car, cell phone, or computer mostly for business, perhaps the company should be paying for it.
I recommend: Wells Fargo offers a variety of retirement plans for small businesses, as does the
Bank of America. The
Health Insurance Buyers Guide and
HealthInsurance.com can help you make decisions about the feasibility of health insurance.
Consult with a professional
If your business is incorporated, stock, stock options, and dividends are factors in your compensation package. A tax professional can help you structure your pay package in keeping with the IRS’s regulations regarding reasonable compensation and the relative percentages of salary and dividends as portions of total compensation.
I recommend: CPAs and financial planners in your area can be located through
Accountants World or the
CPA Directory; tax attorneys can be located through
FindLaw or
Lawyers.com. A quick primer on some of the issues associated with “reasonable compensation” as defined by the IRS is provided by the
Business Owners’ Toolkit.
Tips & Tactics
Helpful advice for making the most of this Guide
- Plan conservatively at first; cash flow can be a concern for even the best-organized start-ups. Build in incentives and raises so that your income grows with your company’s.
- Seek professional financial advice to be certain that the company’s finances and your personal finances are structured appropriately and kept separate. A tax professional can also help you structure your compensation package (salary, dividends, benefits) so that it is as advantageous as possible from a tax standpoint without raising red flags at the IRS.
- Your business structure has an effect on financial planning, including how your compensation is best approached. The best compensation package for a sole proprietorship may not be the optimal arrangement for an S-corporation.
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