For many small business owners, deciding how much to pay themselves is a struggle. Taking money away from the business in its early years can seem counterproductive. As a result, even if they do pay themselves, many entrepreneurs pay themselves far less than the going wage.
Apparently, this approach is even more common among women business owners, the 2016 American Express OPEN Small Business Monitor reports. Overall, the study says, the number of small business owners (both male and female) who pay themselves a salary has decreased compared to last year (51 percent compared to 57 percent last year). Those who do take a salary, however, have given themselves raises since last year — an average of $2,310, taking the average small business owner’s salary to $76,010.
However, the study found a significant discrepancy when it comes to pay. Male business owners are more likely to pay themselves a salary than women business owners (57 percent of men vs. 42 percent of women), and on average men pay themselves $17,470 more than women. This is partly because the average business owned by a man has higher sales than the average business owned by a woman. But that’s not necessarily the whole story. I think that all too often, we women undervalue our work and don’t charge enough for our products or services. That can easily translate into not valuing yourself enough to pay yourself an adequate salary – or any salary — even if your business can afford it.
Paying yourself a minimal salary — or not paying yourself at all and instead, putting everything back into the business — is not necessarily a bad thing. First, money kept in the business is not subject to taxes the way it would be if you took it out to pay yourself. Second, if your business isn’t yet profitable, you can’t afford to pay yourself, because you have to pay the expenses and overhead to keep your business running first. But it’s important to make sure that your salary decisions are based on a logical assessment of what makes the most sense for the business—not on a feeling that you need to settle for less.
In fact, when you don’t pay yourself an adequate salary, you open yourself and your business up to some risks.
- You risk messing up the business’s books. If you don’t have enough of a salary to live on, you may end up taking money from the business — not necessarily in a planned way, but by doing little things like using a business credit card to pay a personal bill, or taking petty cash out of your business bank account to meet expenses. In the long run, this type of haphazard approach can leave your business short of funds
- You risk getting in trouble with the IRS. Using business finances to pay personal expenses because you’re not making enough money can cause problems at tax time. If you don’t keep business and personal finances separate, the IRS will take a closer look at your tax returns than they would otherwise. If you’re not getting compensation at all, this can also raise a red flag.
- You risk stressing yourself out. Unless you have enough savings, a spouse’s income or other money to live on, trying to get by on a bare-bones salary — or no salary at all — will inevitably cause major stress. Running a business is stressful enough without personal issues rearing their heads. If you’re constantly stressed, your business will suffer, too.
If you’re having trouble determining how much to reasonably pay yourself, consulting your accountant can help you figure out an amount that make sense both for you and for your business.
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Rieva Lesonsky is CEO of GrowBiz Media, a media and custom content company focusing on small business and entrepreneurship. Email Rieva at firstname.lastname@example.org, follow her on Google+ and Twitter.com/Rieva, and visit her website, SmallBizDaily.com, to get the scoop on business trends and sign up for Rieva’s free TrendCast reports.