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The Finances of Paying Your Own Salary
Factors to consider before you cut yourself a check

As an entrepreneur, you’ve probably considered and calculated a myriad of expenses, including the cost of inventory, rent, utilities, shipping and equipment. But have you considered how much you’ll be paid for your time and effort? If you haven’t, you’re not alone. According to marketing entrepreneur and small business advisor Alice Bredin, unless you know how much you should pay yourself, you won’t fully be able to comprehend the true state of your enterprise’s wellbeing. “Without factoring in all expenses, you won't know if you need to raise prices, market more, cut costs or make other adjustments that will help your company succeed," she explains. Since paying your own salary is an essential part of entrepreneurship, here are some tips for making this process run smoothly.

Are you ready to pay your own salary?

You have a lot to consider when getting your business off the ground. When your company is first starting out, it probably won’t be financially practical for your business to pay you a proper salary. However, once your revenue stabilizes and your company profitable, it’s time to figure out your salary. Whitney Delaney, an entrepreneur who founded Delaney Tax and Wealth Management, suggested that your business should meet a few criteria before you write yourself a check. First, make sure that your company has a stable stream of revenue and will continue to earn money for the foreseeable future. You should also make sure that your company’s earnings are exceeding its expenses. Delaney asserts that if your business meets these guidelines, it’s time to make your salary a part of your budget.

Bust out your budgeting skills

In order to figure out how much to pay yourself, you should first figure out how much money you need. To create a meaningful estimate, The Small Business Encyclopedia recommends creating a personal balance sheet that includes your housing, food, clothing, debt payments and similar essentials. You may find yourself needing to cut back in some areas of your budget. Delaney suggests paying yourself a small salary — one that’s as minimal as possible. However, since figuring out your personal expenses can be a tricky process, she also advises consulting with your tax preparer to get an informed opinion on an exact figure to pay yourself. Regardless of how much you choose to pay yourself, just make sure your salary doesn’t leave your business strapped for cash, warns Evan Singer, the president of SmartBiz.

Consider laws and taxes

The way you pay taxes on your business income will vary based on your company’s corporate structure. If you have a sole proprietorship, your business income is treated as your personal income. However, if you have a corporation, you’ll receive a salary like any other employee. Similarly, you’ll have to file your taxes using Form 1040. According to The Small Business Encyclopedia, since you can set your own salary, you can strategically give yourself and your company better tax rates.

While running a small business can be overwhelming, you’ll likely find that you love the independence of paying your own salary. However, always check with a tax attorney to be entirely sure that you’re managing your income legally and advantageously.


Published by Education First Federal Credit Union
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Disclaimer - All content contained in this newsletter is for informational purposes only and should not be relied upon to make any financial, accounting, tax, legal or other related decisions. Each person must consider his or her objectives, risk tolerances and level of comfort when making financial decisions and should consult a competent professional advisor prior to making any such decisions. Any opinions expressed through the content in this newsletter are the opinions of the particular author only.

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