Growing pains: How to adjust salaries as your profits grow

March 31, 2018

Starting a business can involve a lot of sacrifice, including living off your savings until the business breaks even. Vendors have to be paid, and you can’t expect employees to work for free. But once your business has become a little more established, and you’re consistently making a profit, it may be time to pay yourself a set salary, for the sake of your personal budget and for the business’s budget, too.

But how do you know when it’s time to set a salary for yourself? How do you know how much that salary should be? And when do you give yourself a raise? Here are 5 questions that will help you determine how much to pay yourself as your profits grow:

1. How much do you need to make?

Take a close look at your personal expenses. Think about what’s really sustainable. How long can you really live on ramen? Will you burn out if you don’t budget in money for a vacation at least once a year? (Hint: The answer is probably yes.)

2. How much could you make at another company?

If your business is structured as a corporation, the IRS requires you to make “reasonable compensation” for your work. That means underpaying yourself could be a costly mistake. Check out online tools like Payscale, or ask around—an accountant or a recruiter, for example, might have a good sense of what the going rate is for someone with your skills in your area.

3. How long have you been in the black?

If your business just started breaking even last month, you might want to wait a little while longer before you determine your salary. Ideally, you should wait until you’ve been profitable for a year—that way you can be reasonably confident that you can make a plan and stick to it.

4. How stable are your profits?

If you’re in a cyclical, seasonal, or otherwise variable business, you’ll want to take that into account. Don’t set a salary based on your best quarter. Depending on how your business is structured, you may be able to give yourself a lower base salary (as long as it’s “reasonable”) and then take bonuses each quarter based on the business’s profits. Talk to your accountant to make sure the system you’re considering works with the IRS requirements for your business.

5. How much do you hope to grow in the next couple of years?

Growth can be expensive—if you’re hoping to expand in the near future, think about the additional expenses involved. Will you need to hire more staff, rent a new location, or pay for more raw materials? Will you need more help from lawyers, accountants, or other professionals? Factor those expenses in when you’re figuring out how much you can afford to pay yourself.

Once you’ve determined how much to pay yourself, experts recommend checking back in every six months or so to make sure that this system is working, both for you and for the business. If your profits have continued to grow, you could consider giving yourself a raise based on your annual growth rate—if your business has grown 10%, you get a 10% raise—or simply running through these questions again to see where you fall. Whatever salary you come up with, using a tool like Gusto Payroll to automate payroll, deductions, and benefits can make things a lot easier—and provide an automatic record of what you’ve been paid when tax time comes.

[image: 31/365: Go Doughboy by bradleypjohnson on flickr]

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