BENEFITS

Growing BusinessBENEFITS

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  • Compensating Key Employees

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    How Much Should You Pay Yourself?

    As a small business owner, you can be flexible in how much salary you receive. But this may involve a trade-off between your personal financial needs and those of the business. You might have bills to pay personally, but the business could face financial constraints as well.

    How much salary? How much non-salary compensation?

    One factor in determining how much salary to take could be the business’s operating structure. For example, it could be a partnership, limited liability corporation (LLC), C corporation or S corporation. If the corporate tax rate is lower than your personal tax bracket, it might make more sense from a tax management perspective to pay yourself a lower salary.

    And because of the availability of numerous forms of alternative compensation, including deferred compensation and supplemental insurance plans, paying yourself a more modest base salary may be advantageous. A lower salary could mean additional deferred compensation, for instance.

    Should you give yourself a raise?

    The question of a raise may depend on how high or low your salary is relative to the norm for your industry or situation. Also keep in mind the issues mentioned above. What makes the most sense overall, considering your personal needs and those of the business as well? What are the tax implications?

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    Game Plan

    • Research and consider all forms of compensation, weighing the trade-offs between salary and non-salary compensation. Remember, it’s your total compensation––after tax––that matters most.
    • Visit the bizfilings.com website, which has a number of informative articles, including “Compensate Yourself Adequately to Build Wealth” and “Understanding the Tax Consequences of Compensation."
    • The IRS website will provide information on various business structures and their tax treatments.
    • Consult with a good tax attorney, ideally one who specializes in employment.
    • Ask your accountant or tax planner for guidance.
    • Talk with other business owners to learn about salary norms, ranges or averages.