A number of small business owners often haven’t a clue as to how they go about determining what their salary should be so therefore they will often take draws from the company to avoid dealing with payroll taxes and avoiding having to make that tough decision. However if your taxes are filed as an S-Corp, you are required to take a “reasonable” amount in the form of a paycheck, so it’s imperative that you determine what you need to do.
Questions to ask yourself:
1. How much can your business afford?
2. How much was your previous salary when you left the corporate world?
3. How much are your current living expenses that you need to cover?
When you’ve begun answering these 3 key questions, you need to determine an annual amount and then divide it between the twelve months of salary you will need to cover. If you need to increase your salary and your business can afford it, do it. If you need to decrease your salary because it puts a strain on your cash flow, then you have the right to do it as well.
If you’re still unsure as how to determine your salary, then consider these other questions:
1. How much would you be paid if you were offered a similar position for what you’re doing now?
2. How much are other people in your same position are being paid?
3. If you needed to replace yourself, how much would it cost to pay someone to do your position?
If you’re in the position to where your salary is hurting your cash flow, you can consider utilizing the opportunity for making contributions back to the company, which will help increase the equity in your company. Some people may think that it’s a shell game, but that’s just the way the system works to your advantage. It’s also important to understand the factor of how your financials will appear depending upon the route you go.
Taking a large “salary” through your company will help decrease your profit and allow you to continue paying into the system to help increase your Social Security benefits should you ever need them. However, if you are seeking out an investment or loan for your business, this will be one of the first items that will be a target to anyone reviewing the statements. However if you choose to take a portion of that salary that you don’t need and re-invest it back into the company, then you build up equity and it can make your bottom line look better. This allows you to justify your actions and promote your continued commitment to your business.
About Our Show Advisor: Dwayne Briscoe is the founder and owner of Bookkeeping-Results, LLC. Dwayne began his company in January 2007, based on the foundation to educate small business owners and bookkeepers who use QuickBooks®. Working as a full-charge bookkeeper and trainer in a variety of industries for over 15+ years, he is a certified Pro Advisor with 5 certifications, including Enterprise Solutions and Point of Sale. He is also an instructor at Brazosport College in Lake Jackson, where he teaches basic accounting, QuickBooks®, and basic payroll, along with hosting his own private classes.
Bookkeeping-Results, LLC has focused more on quality and not quantity for their clients, by paying attention to the details. Through regular continuing education participation, as well as exploring additional ways of “thinking outside of the box” to help expand people’s knowledge of their own financial well being, it’s important to focus on not only saving the client money but also making the client money.