Business owners are responsible for giving salaries to their employees based on their position and level in the organization. While it is the job of the employer to provide a handsome package to the workers, he must calculate his salary as a business owner to understand what is his net income. It is very difficult to specify the right salary of a business owner as each has its method of calculating the gross annual income.
This most compelling aspect for a business owner is to reward himself with a respectable paystub. It is very confusing as there is no particular formula that determines the salary of a business owner. In this blog, we have listed down steps that will help an employer or an aspiring entrepreneur understand how to calculate salary as a business owner.
We have listed the following points in this blog -
- Why draw a salary as a business owner?
- Why is this paycheck important?
- When to take a salary for self?
- What is the formula to calculate an entrepreneur’s salary?
- How to calculate the salary as a business owner?
- Key Takeaways
Why draw a salary as a business owner?
The main motto of withdrawing a salary as a business owner is it helps them decide and regulate a fixed amount that can be withdrawn from the business capital. However, if a small business owner forgets to fix a specif amount as his salary, then it becomes very tough for the employer to keep an accurate track of the business expenditures while maintaining bookkeeping records. Furthermore, once an employer has decided on a fixed salary for himself, he would have the motivation to think of new tactics for business development and thus, ensure it runs smoothly. These intangible factors like salary as a business owner are considered to be a good motivator by the business owners.
Why is this paycheck important?
If you are an entrepreneur who has just stepped into the business world, it is very normal to have questions regarding the importance of salary as a business owner. According to a statement by Alice Bredin (B-2-B Marketing entrepreneur and small business advisor for OPEN), a business owner must compensate himself for the betterment of the company. She further stated that if a business owner is not allocating funds as his salary, then the bookkeeping records do not showcase accuracy for the company and it becomes difficult to predict the current health of the organization. The reason for this is the business owner fails to consider his salary which should be counted as a huge expense by the organization. A business owner can't raise product prices, do marketing, cost-cutting or have any other adjustments for the success of the organization.
According to Evan Singer, CEO of SmartBiz Loans who is one of the providers of Small Business Administration Loans (SBA) entrepreneurs must recognize the value of the time they put in for the business. Hence, whether it is a small business or a multinational conglomerate, every business owner must understand that his time is valuable and hence cannot be for free when you are running an enterprise.
When to take a salary for self?
A small business owner who is new in the market might not have a clear idea about when to take a salary as a business owner. When the company is new and there is a tight budget for the proper smooth functioning of the organization, a business owner might keep his salary as the last priority. However, an entrepreneur knows that when the business income becomes stable, he can pay himself.
If you are a small business owner or a fresh entrepreneur, then you should ask the following questions before taking a salary as a business owner -
1. Has the company made sustainable revenue
2. Does the company have a steady projected revenue required for business growth?
3. Is the business done in black?
The above questions were proposed by Whitney Delaney who is the founder of Delaney Tax & Wealth Management. According to him if the answer to all the above questions turns out to be “yes” then the business owner is in a comfortable position to pay himself. It means the businesses that have moved ahead from the startup phase have been firmly established in the market and employers must take the salary of a business owner.
What is the formula to calculate an entrepreneur’s salary?
An aspiring entrepreneur must know that there is no defined formula to calculate the amount that he needs to take for his salary as a business owner. He would be required to use variables such as business overheads and business capitals to calculate his monthly paystub.
Also, a small business owner must understand that if the business has been just set up and is considered a startup in the industry, then his salary would be a combination of what is remaining after the clearance of bills from the sales made by the company. Also, if the business is continuously making profits for a substantial period, then the employer can mark the surplus profitable earnings in the income as his paystub. However, the business owner needs to do both these activities at the same time. For this to happen, he would have to hire an accountant or consult a tax professional to understand what should be his salary as a business owner.
An accountant can regulate what amount a business owner should pay himself. It ensures that the legal structure of the company is maintained and the employer does not take a huge percentage of the business revenue as his salary. A reasonable paystub can be determined by the accountant for the business owner as the focus remains on business growth for the future. Hence, an employer must be ready for a flexible paystub for himself for situations such as restricted cash flow or when the market is down.
How to calculate the salary as a business owner?
Entrepreneurs are bound to be confused when it comes to taking a salary as a business owner. Hence, we are going to discuss the steps on how a business owner should calculate his salary. Let us understand these points in some more detail -
1. Calculate monthly net income: A small business owner or an entrepreneur should have full knowledge about his monthly net income as it is considered to be the foundation of his paycheck. Furthermore, having an idea about it helps the business owner understand where he is spending dollars on that is he gets to know about the expenses.
In short, Net Income = Gross revenue - Business expenses
A business owner does not need a specific calculator to understand what salary he is going to get per month. He can simply understand his monthly net income by running a profit and loss report for his monthly bookkeeping record
2. Do a calculation about the tax savings: A business owner has to pay the federal and state taxes to the government according to the rules laid by them. Hence, the employer must figure out ways to save because taxes are an inevitable part of the business. An employer who has just launched his start-up must give office decorations, parties and celebrations second priority. Most small business owners usually think about saving taxes after they have completed loan payments. However, an important point here to note is if your business is generating profits or not, you would be liable to pay taxes.
If you are a business owner who has no idea about how much to save after paying taxes, then according to reports a safe starting point to save for taxes is considered to be 30 per cent. It means if an employer has a monthly income of 1,00,000 dollars then he should put aside 30,000 dollars each month. If the employer has a higher tax bracket or is in partnership with another business owner, then he would have a higher percentage of tax savings. To understand what would be his exact amount, he should take the services of an accountant or tax preparer.
Here are the formulas a businessman should use to calculate his monthly tax savings
Monthly tax savings = Net Income * 30%
Business owner Access = Net Income - Monthly Tax Savings
3. Know about your business debts: Taking a salary as a business owner is not so easy for an entrepreneur who is under a huge business debt. He needs to first clear his debts by paying monthly premiums to the bank from which he has got the loan for business. Usually, the business owners have a fixed monthly instalment to be paid to the bank and he must also keep in mind that loan interest is considered to be tax-deductible. If the business owner has borrowed money from a lender, then he needs to give a specific amount to that person. In the end, whatever is left after clearing the debts would be considered as the salary for the businessman.
Hence, owner income can be calculated as = Amount remaining after the tax deductions in the above step minus the instalment of debts
4. Do an accurate calculation about the investments: Every business owner has to keep the investment as a topmost priority when he is thinking of expanding his business. As business is in continuous growth, every employer would like to think about where he should invest once his debts and taxes have been taken care of.
Every employer must be particular about the investments before he starts writing the paystubs for employees. It will help him understand where he should save money to manage multiple responsibilities such as new hiring, brand management, equipment purchase, employee training programs, website development to have an internet presence and emergency funds. Once he has decided the amount for all these and other categories, he would be in a better position to understand how much salary as a business owner comes into his bank account.
5. A practical approach is a must: An employer can only take a salary as a business owner once he has sorted the financial distributions in the company. He should be very clear and real about the fixed expenses, variable expenses, instalments and other extra expenses regarding the company. Judge the actions and act according to the situation. There might be a complete arrangement in the organization but a business owner must act wisely and according to the situation. By doing a thorough comparison of what are his personal wants and what is needed to run the business efficiently.
6. Do a double-check! Once the business owner has determined the personal needs and company’s position, he would have a sound understanding of his paycheck. He should be very clear about the business expenses, payments for business debts, savings as well as his personal needs. Once the employer knows about his priorities he would be able to decide what he has to do with the surplus amount earned in business and then can take the remaining portion in the income as his salary.
If he gets a major mismatch in the sheet and comes to know there is an imbalance in the expenses and savings, he always has an option to reallocate the amount kept aside for every part of the business. Giving attention to business instead of personal needs can give the employer a better salary as a business owner. For this to happen, his priorities must be decided in advance as only then he would take efforts to generate a profitable income for the business.
Are you ready to calculate your salary as a business owner after reading this blog? It is always important for an employer that the money he is investing in a business is giving a good ROI and suits his position in the industry profitably.
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1. A business owner must not work for free when he decides to set up his startup. He should always have respectable pay for himself that satisfies his personal needs.
2. Taking a salary as a business owner is considered to be a good motivator for the employer and he would think of innovative ways to expand his business. When the company has a sustainable business and sees good profit, an owner can decide on his pay for the month.
3. There is no specific formula to calculate an employer’s salary as he is responsible for keeping an eye on various calculations. He should do a monthly checking of the net income, tax savings after the taxes are deducted from the income, and instalments for business debits and also do a thorough check of where he should invest for business growth.
4. After doing all these subtractions and paycheck for the employees, whatever the remaining amount is the fees that an employer can take as a salary for himself.
5. He should always have a practical approach while deciding on his paycheck. This means he cannot decide on a particular amount if he has just started the business or if the company is still considered a startup. The owner can also take guidance from an accountant or tax professional about his monthly salary.
6. The business owner must be very clear about his priorities as it will help him decide how he wants to grow his business. It will not only help him understand multiple factors such as total income, tax savings, expenses, and business debts but also help him decide if he should realign the amount fixed for each field in the company.