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Question added to topic MoneyAugust 30, 2007

How do I determine how and when I pay myself?

My partner and I are starting a small business. We are beginning with a soft opening with the grand opening following two months later. We have goals and standards for market share and customer numbers. We have done break-even analysis and have nearly all of our costs figured out. What we are unsure of is how to determine how much to pay ourselves, and when to pay ourselves.
  1. I recommend you pay yourself what you would pay an outsider to do the job you're doing, and on the same schedule that you'd pay other employees. And I practice what I preach, this is what I've done with my pay as I built Palo Alto Software, except for two lean periods in which I paid everybody else, but not myself. I like this option because it gets you used to seeing payroll as what it is and include it in the numbers of the normal course of the business.
  2. I don't recommend working for less than market rates. If your company doesn't have the cash flow to pay you market rates -- that happens a lot -- then document the amount of unpaid salaries and keep track of that as company debt. Be careful with this, though (see the following point) because you can't expense payroll not paid, and when you do pay it you owe employer taxes on it.
  3. I also recommend that you work with a CPA you can trust, and get him or her to help you with the details. Payroll is a touchy legal area with a lot of tax implications and heavy penalties for some scenarios that could happen innocently.
  4. I suggest that you don't optimize based on the absolutely lowest taxes related to paying yourselves, because some of the more aggressive tax strategies in this area make it harder to see the real flow of expenses in your business. Your compensation is an expense. Some tax treatments take your compensation as draw from profits, which bothers me because it gives an inaccurate picture of the real flow in the business. Talk to your CPA about that - it isn't trivial.

Tim
Tim Berry is the president of Palo Alto Software Inc., based in Eugene, Ore., which produces business planning software. He is also the author of 3 Weeks to Startup and The Plan-As-You-Go Business Plan, published by Entrepreneur Press.

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