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How to Pay Yourself When You Own a Business

15 min read

As a business owner, you have complete authority over your finances. You decide how much to invest in daily operations, how much to spend on marketing, and even how much to pay yourself.

But as they say: with great power comes great responsibility.

Finding the fine line between rewarding yourself and investing in your business can be difficult. You want to balance your business’s growth but also give yourself the financial security needed to make responsible decisions.

If you’ve ever struggled with figuring out when and how to pay yourself, this post will help you out.

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Ways to Pay Yourself

While a monthly salary is obviously a widely accepted way to pay yourself, there are a number of alternatives. As with anything money related, each comes with its pros and cons.

Monthly Salary

If your business is registered as a corporation (C-corp or S-corp in the US), you can pay yourself a monthly salary. You get a fixed income each month from the corporation’s profits. The exact amount is decided by shareholders.

In some corporate structures (such as an S-corp in the USA), you are legally bound to pay yourself a salary, however small it may be.

Pros:

  • Monthly salaries are predictable, stable, and make for easier accounting.
  • Getting a salary means that you can invest in retirement plans such as a 401k or Canadian RRSP.

Cons:

  • Salaries are 100% taxable, so this might increase your tax burden depending on your country and tax bracket.
  • In some countries, you are liable to create a payroll account with the tax authority to pay yourself.

Learn more: Registering Your Ecommerce Business: Sole Proprietorship, LLC or Corporation?

Dividends

Apart from salaries, a popular way to pay yourself as a corporation is through dividends. A dividend is essentially any profit extracted from an incorporated business after all its liabilities (including tax) have been taken care of.

Dividends can be extracted as many times and in as large an amount as necessary—provided it is approved by all shareholders.

A lot of business owners prefer to pay themselves small salaries and then make up for it by regularly extracting dividends from the company.

Pros:

  • Dividends are usually taxed at a lower rate than wages, so you’ll save on taxes.
  • If you pay yourself in dividends, you might not be liable to pay for mandatory government pension.
  • It is usually easier to pay yourself in dividends—you can write yourself a check and make a record via a director’s resolution (a document describing an action authorized by the board of directors of a corporation.)

Cons:

  • Dividends don’t count as “personal income.” This might prevent you from investing in accounts, like a 401k or Canadian RRSP.
  • Owner’s Draw

    If your business is registered as a proprietorship or a sole-member LLC, you can “draw” profits. This is called the “owner’s draw.”

    Since the proprietorship is considered to be wholly owned by you, you can draw as much and as frequently as you want. Drawing money from your business reduces your “capital account” (the amount you’ve invested in the business).

    Pros:

    • It’s very easy to pay yourself—you just have to write a check and deposit it into your personal account.
    • No social security, Medicaid, federal, or state taxes are taken on draws. This does vary from country to country.

    Cons:

    • If you pay yourself entirely via draws, you don’t have any personal income on paper. This can cause a problem when applying for mortgages or personal loans.
    • Any money you take out is taxed as personal income. This can be higher than corporate taxes in some countries.

    Most business owners prefer to pay themselves via a mix of salary and dividends/draws. A regular salary ensures that you have a consistent source of income. Any additional profits you want to extract can be done via dividends or draws.

    Also, keep in mind your country’s taxation structure. In Canada, for instance, if the business makes more than $500,000 in profits, it doesn’t meet the “Small Business Limit.” You’ll get bumped to a higher tax bracket. Some business owners prefer to pay themselves a higher salary to cut down profits below the $500,000 limit.

    As laws differ from country to country, you shouldn’t choose the best way to pay yourself just by reading online articles. Make sure you consult a trained accountant and get professional legal advice to avoid missing out on important details.

    How Much to Pay Yourself

    This brings us to the reason for this post: how much should you pay yourself? Your salary will depend on a number of factors—industry norms, profitability, tax structures, etc.

    Industry Norms

    How much you’ll pay yourself depends on the established norms in your industry.

    To give you an idea, the median wage for chief executives in the US is $179,520, according to the Bureau of Labor Statistics. Of course, this figure is skewed due to a large number of overcompensated corporate CEOs, but it gives you a general idea of how much a founder/CEO makes.

    However, when you look at CEO salaries by industry, you see that the figures differ a lot. For example, in the ecommerce industry, the average salary for a CEO in the US is $210,000 a year, while a hospital CEO makes $154,246 a year on average. That’s why it makes sense to research the average compensation in your industry.

    Ask your friends and acquaintances in the industry about their own compensation. Come up with something similar (as long as it doesn’t impact profitability). And don’t be afraid to ask about salaries!

    Your Personal Income Requirements

    When you’re just starting your business, it makes sense to reinvest as much of the profits into the business as possible. Even when you do decide to take a salary, you should strive to keep it as low as possible to avoid slowing down your business growth.

    One way to come up with this figure is to do a close audit of your personal expenses and create a personal balance sheet. Through a budget, you should find the minimum amount of cash you need each month to live. That amount should include:

    • Rent and utilities
    • Groceries, fuel, dining out, etc.
    • Debts including existing loan and credit card payments
    • Monthly, quarterly, and annual payments such as car insurance, medical insurance, etc.
    • Average monthly miscellaneous expenses.

    Your salary should be at least 10% higher than all these expenses combined.

    There are dozens of personal balance spreadsheet templates available online, not to mention personal finance apps and online calculators. Most of them are free!

    So don’t hesitate to check out a few to find the most convenient way of maintaining your personal budget.

    An example of a budget planner worksheet (Source: NerdWallet)

    Salaries at Equivalent Positions

    Another way of figuring out your salary is paying yourself an income equivalent to what a person in your position would typically make.

    Look at job openings and Payscale reports to check average salaries for employees with similar skills as yours. Avoid comparing yourself to C-suite executives at large companies; their compensation is usually inflated.

    For example, here’s what Payscale says is the average income for a CEO. Note how CEOs make a lot of money through bonuses and profit-sharing.

    At first, your business might not be able to handle a CEO with a $160,000 a year salary. Instead, look at managerial and senior roles in developing, marketing, designing, or operations. Salaries in these positions are reasonable yet competitive.

    When calculating your own salary, add a premium because your responsibilities will usually extend beyond a typical employee’s.

    Your Business Legal Structure

    As we explained earlier, different corporate structures offer different ways to pay yourself. Tax rates also vary based on how you’re incorporated.

    Your business structure is one of the major factors in deciding how much you pay yourself. For example, if you are incorporated as an S or C-corp in the US, it might be more tax-efficient to pay yourself a small but reasonable salary, then take out more money through dividends.

    The important thing to note is to pay yourself legally. For example, in the US, outside of a proprietorship (where you can pay yourself via owner’s draw), you shouldn’t dip into the business funds randomly. There should be a proper record of any money withdrawn from your business to personal accounts (either via salary, bonus, or dividend).

    If you don’t record when and why you pay yourself through business funds, you risk an Internal Revenue Service audit. This is bad for you, your business, and your brand. Your customers can lose faith in your business, and you face a lot of expenses.

    Consult an accountant to find the most tax-efficient way to pay yourself based on your business’ legal structure.

    Opportunity Costs

    Any money you take out of the business has an opportunity cost.

    Opportunity cost is the loss of other alternatives when one alternative is chosen. If you have any existing opportunities for your business, it makes more sense to maximize the opportunity and minimize your salary.

    Consider an example: you’re running a successful Facebook ad campaign. For every $1 you put into the campaign, you make $1.5 back—a straight 50% profit.

    Experienced ecommerce business owners know that such profitable campaigns are very rare. You want to maximize the returns by putting all spare money into the campaign.

    Keep this in mind when figuring out your salary. If you spot any current or future opportunities, reduce your salary and put that money into the business instead.

    Consider Your Salary Before You Start a Business

    Chances are, you worked a job before starting your ecommerce business. Ideally, you want to pay yourself at least the same amount as your last job.

    For example, suppose you were making $20/hour in your last job. This would give you an annual income of $41,600 at a standard 52 weeks of work (this is S in the equation below).

    Add a 10% bonus to this figure given your additional responsibilities as a business owner. Further, add inflation to the salary as well. This will make financial planning easier.
    Thus, with an inflation of 5%, your salary would be:

    S + (10% of S) + (5% of S) = $48,084; when S = $41,600.

    Think of this as your replacement salary. This is the salary at which you can replace your existing job.

    To Sum Up

    Ideally, you should pay yourself a salary only after you have sustainable, scalable profits. Once you decide to pay yourself, choose the most tax-efficient method as per your corporate legal structure.

    Consider industry norms, your past salary, and the salaries of people with similar skills as you. Make sure to maximize any existing opportunities before paying yourself.

    What’s Next?

    Now that you know how you are going to pay yourself, it’s time to answer another important question. How are you going to get paid?

    For online store owners, there are dozens of ways to accept payments online. However, the ecommerce platform you use influences the types of online payment methods you can implement.

    To get the most out of your payment gateways, you need to choose an ecommerce platform integrated with many different payment methods. For example, Ecwid by Lightspeed supports over 100 payment providers.

    When choosing a payment method for your online store, you can’t go wrong with safe and secure payment gateways. For example, Lightspeed Payments in the US is a great choice. It allows you to accept payments in your online store via all major credit and debit cards, Google Pay, and Apple Pay. Not to mention, it has competitive fees (2.9% + $0.30 per transaction). Plus, no hidden fees!

    If you run an Ecwid store, you can sign up for Lightspeed Payments right from your Ecwid control panel. There, you can manage payouts, see payment details, and set up refunds. Set up Lightspeed Payments.

    Giving your online shoppers payment options that are both safe and convenient is one of the things that prevent abandoned carts. If customers can’t find their preferred way of payment in your store, it’s likely they are going to seek a website with a more convenient checkout. And when you lose customers, you lose profit—and your salary.

    Not sure how to pick payment methods for your online store? Read this article on how to find the best payment system.

    Do you want to learn more about selling online?

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    About the author

    Jesse is the Marketing Manager at Ecwid and has been in e-commerce and internet marketing since 2006. He has experience with PPC, SEO, conversion optimization and loves to work with entrepreneurs to make their dreams a reality.

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