How, and when, to take pay from their business is something that many entrepreneurs struggle with. There’s no flag that’ll pop up to say “now’s the time!”, so you have to judge for yourself.
Growing a business takes a lot of passion and sacrifice. It’s difficult to know where to draw the line between sacrificing for your business, and struggling to get by.
There’s a lot of misinformation out there, so here are 3 things you might have wrong about taking pay from your business.
You shouldn’t pay yourself
When you’re a fledgling business, it's expected that you might not take any pay. You’re growing your business, and may not even be making enough to cover all the businesses expenses, never mind the cost of you. It’s even likely you may have another job to help support you while starting a business.
But once you’ve been in business for a few years, and you still aren’t taking any pay, then it’s time for some deep reflection.
Are you not making enough money? Why not?
Are you not charging enough for your services?
Are your expenses too high?
Many entrepreneurs go into business to follow a passion, but being passionate doesn’t mean being a pauper. This business that you’ve built isn’t a charity and you aren’t a volunteer. If you’re going into debt in your personal life, while your business is bringing in money, you need to figure out why that is.
It is not “normal” to not take pay from your business. Some of your profit needs to go back into the business, it takes money to make money after all. But your salary should be figured into your recurring expenses and you should be getting paid like any other supplier or employee
Ignoring IRS requirements
Depending on your business structure, it’s possible that you may be required to pay yourself an actual salary.
Per the IRS:
Because an officer of a corporation is generally an employee with wages subject to withholding, corporate officers may question what is considered reasonable compensation for the efforts they contribute to conducting their trade or business. Wages paid to you as an officer of a corporation should generally be commensurate with your duties.
Don’t think that you can take $1 a month and be compliant with this requirements. That bit about “reasonable compensation” is key.
The IRS knows what a person in your position should be making, and your pay should be somewhere in that range, unless you have a darn good reason not to. And you better be prepared to explain to the IRS exactly what that reason is.
Funneling all income back into the business
Do you intend to retire some day? If you’re one of the millions of Americans dream of retiring on a sandy beach, then I want you to consider the long-term ramifications of not taking pay from your business.
We’re all familiar with the phrase, “don’t keep all your eggs in one basket”. By not taking any pay, that is exactly what you are doing. As with all investments, diversification can help balance your money through the normal ups and downs of the economy.
Selling a successful business that you’ve built can absolutely be part of your retirement plan, but it shouldn’t be the only option you have. Building a 401K or an investment portfolio can give you additional security if anything unexpected should happen to your business.
Bottom line
You should be taking pay from your business, with very few exceptions. It’s easy to fall into the trap of just pulling out money as you need it, but this is just creating more work for yourself.
Sit down with your books, and come up with a pay schedule for yourself. This should be a set amount that comes out on a regular basis. Even better if you can automate it.
If you’re struggling with how much you should be paying yourself or how to go about it, I can help! Still Waters Bookkeeping can take the guesswork out of your business finances, and reduce the stress that comes from not knowing.
Contact me today to find out how.