The context of pay we have with the client’s range depending on whether we are discussing the reasonableness of an owner’s salary, tax strategy or just a practical approach in the context of personal finances.
In the context of determining if a business is profitable, many business owners pay themselves last or sometimes not at all. If this is the case, you don’t have a functional business. The owner’s pay isn’t a separate checking account or part of an accounting hack. It is a practical component of a business’s operating budget. Some items to consider when determining the salary amount:
1) What would it cost to replace your duties in the business? This isn’t the same as replacing you in the business as this would be a component of both salary and net income or profit. Determine what those duties are and look to other businesses as a point of comparison. Look to statistics as to what owner’s get paid in your type of business as compared to gross receipts and net income (usually ranges from 40-60% for most small businesses)
2) How much time and effort are you putting into the business?
3) Look at your personal budget and determine what you need to pay your personal bills. If the business can’t afford to pay this amount, you need to lower your lifestyle of living. Taking regular distributions from your company to cover personal bills means your salary is too low.
4) Is your salary high enough to cover your tax liabilities in your business? This avoids having to implement another accounting hack to pay taxes. Each business should have processes implemented to where taxes are paid incrementally as part of the expenses of the business.
