The small-business worker who frequently receives the lowest wages

The small-business worker who frequently receives the lowest wages

Credit to Cheryl Winokur Munk@CherylMunk

 

 

 

Major Points

Up to 25% of small business owners, particularly new ones, do not pay themselves at the same rate as their employees.

That is a mistake that could increase their financial stress and end up having an adverse effect on how they decide to conduct company.

There is no one-size-fits-all solution, but too many business owners cut corners on their own pay even though the majority of business owners earn less than $100,000 yearly.

As their companies grow, many small business owners struggle to determine an adequate take-home wage, and some don't even pay themselves. The founder and the company could simply pay for these errors.

According to experts who counsel small businesses, knowing how to pay oneself appropriately is crucial for the long-term success of a business, even if it's simply a tiny sum that increases over time. Zahir Khoja, CEO of Wave Financial, a provider of financial management software for small businesses, stated that not taking any action "doesn't reflect the genuine health of your firm."

A 2022 small company survey from Wave found that 26% of small business owners don't pay themselves a wage, making the mechanics all the more crucial.

These four suggestions are for small business owners to think about when determining their take-home income.

First, think about your overall financial status.

There is no universal solution. The founders must take into account things like their personal financial situation, business structure, revenue and expenses, including taxes. Making a realistic assessment of how much they could pay themselves without starving the company should be done using this information.

This will mostly depend on the circumstances of the originator. Is the spouse employed? Does the creator need to provide for any dependent children or other family members? Consider paying a mortgage, a car loan, a school loan, a credit card bill, a business loan, or other significant obligations. Another factor to examine is the founder's reserve of personal savings.

Waseem Daher, chief executive officer and co-founder of Pilot, a provider of finance, accounting, and tax services for startups and growing enterprises, said: "All these things dramatically effect what you need to be paid to be able to focus on your business."

Don't pay yourself too little.

Setting the bar too low can also be problematic since entrepreneurs may easily become overwhelmed with the stress of trying to make ends meet. Many founders are fearful of choking their firm by paying themselves too much. If you're devoting so much time to the question of "Should I take a cab or a bus?," Daher added, "you're not spending time on contributing to the business's success."

Owners of small businesses might believe that the money would be better spent on things like updating the website or hiring marketing personnel. But he warned against falling into this trap. Daher advised that in order to make this long-term viable for you, it may be necessary to pay yourself more than you initially anticipated. You must pay yourself enough to actually meet your expenses so that you can concentrate on building a profitable company.

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Make employee compensation as consistent as possible.

According to Chris Ronzio, a serial entrepreneur and founder of Trainual, a platform that assists small business owners in streamlining their onboarding and training procedures, owners should pay themselves at the same frequency as they pay other employees.

He didn't do it when he started his first company twenty or so years ago, and it got harder to do as the company grew. He claimed that increasing your income gradually as the company expands is preferable to doing so all at once.  The objective should be to reach a living wage at which you can pay for your essential expenses. Getting to a market wage that is comparable to what others in the sector are making is the next step. It's all about creating habits, he said.

According to John Buchanan, chief marketing officer of LegalZoom, an online distributor of legal documents for small businesses and families, it's important to periodically review your plans in case you need to make any adjustments. You may decide whether you need to change how much or how often you pay yourself by closely monitoring both your personal and your professional goals and duties, according to Buchanan.

Standard startup founder compensation

Due to their lack of knowledge of their value in comparison to others in similar professions, many founders struggle to determine reasonable compensation. Pilot started conducting an annual poll last year to measure how much self-paying businesses in similar industries, regions, and funding levels are receiving. Notably, the 2022 Pilot study indicated that half of American founders pay themselves less than $100,000 yearly.

Founders who receive venture capital funding are more likely to earn more money. One-half of "bootstrapped founders" make between $1 and $100,000 a year for themselves. In comparison, more over 60% of founders with VC backing make between $50,000 and $150,000 annually, according to Pilot. It might also be helpful to consult consultants, other business owners, internet job boards, and industry trade associations for comparable salary information.

Recognize any potential tax repercussions.

Be cautious to grasp the exact laws associated with the entity you select because, depending on your tax structure, you could get into issue for not paying yourself enough. According to Christopher Colyer, a partner with Eisner Advisory Group LLC, the IRS mandates that the owner of a S or C corporation get a "fair salary" and pay the associated taxes.

Although the cost is arbitrary, Colyer advised owners to typically think about what they would pay a third party to complete the identical tasks and have some concrete data to support this in the event of an audit. If the IRS determined the salary wasn't reasonable, the owner can be charged additional payroll taxes and penalties as a result of the audit. If people are unaware of this problem, it could expose the company to a tax trap, he claimed.