When Is the Right Time to Pay Yourself a Salary? 10

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You might have held off paying yourself while launching your startup, but is it time to give yourself a salary?

You may be the last on your list of creditors when you’re just starting a business, but at some stage, you’ve got to start earning yourself. Here are seven things to consider in order to determine if now is the right time to pay yourself a salary.

1. You’ve been better than “break even” for one year

Assuming you stashed enough cash to meet your fixed and necessary personal financial obligations (such as housing, utilities, and insurance) before launching your business, you’re one of its last financial priorities for at least one year from the time you reach “break even”—which generally takes at least three to six months to achieve, depending on overhead and your industry.

Though that level of restraint may mean living quite “lean” in your personal life for a while, doing so provides an opportunity to establish solid footing for your business as early as possible, so that you have at least one year to learn from the trends and sales cycles that will emerge once you’re past “break even.” With this history, you can accurately forecast business decisions and needs that will eventually drive growth going forward—which will, eventually, lead to a situation where you can potentially give yourself a raise.

2. When tax obligations deem it appropriate

If your business is established as a sole proprietorship, the money you make personally and through your business is essentially “one and the same” in the sense of tax obligations. But, if you’re established as an official corporation, taking a salary can present tax advantages, particularly if it essentially absorbs the income your company realizes, and potentially lowers your corporate tax obligation.  Though you should involve the help of a knowledgeable accountant and small business tax law expert to ensure you are compliant with tax laws that pertain to salary and bonus amounts, paying yourself may mean paying slightly less to the IRS.

3. When you’ve sent the message you want to the outside world

The famed venture capitalist Peter Thiel once declared that the salary an entrepreneur collects from their startup is about a lot more than dollars and cents—it sets the precedent for the guiding force behind the company, among both internal staffers and equity shareholders. When Thiel made that statement in 2008 at TechCrunch50, he said he even uses a startup CEO’s low salary as a proxy of sorts to determine whether an organization is poised to succeed:  “It [the CEO’s salary] goes to whether the mission of the company is to build something new, or just collect paychecks.”

4. When you’ve raised the funding you need to grow

To Thiel’s point above, you’ll likely want to hold off on paying yourself if securing venture capital funding is among your top business goals. Once you generate the financial support of investors, it may be time to reward yourself with a salary.
But, think small: According to The Next Web, more than half of Silicon Valley entrepreneurs pay themselves less than $50,000 a year.

5. When you are confident you can and have paid everyone else

Though you’re technically the “boss” and decision-maker, you also bear the burden of leadership, which means “taking one for the team” and ensuring that everyone you employ and partner with is taken care of financially before you pay yourself. If you don’t have the money to pay your employees and vendors who make running your business possible, it’s not the right time to pay yourself.

6. When you’re debating expansion

Although it can be exciting to see that you’re pulling in consistent monthly profits, don’t make the mistake of thinking you’re poised for expansion until you have accounted for a salary that accurately reflects your ability, time investment, and desired annual salary.

If you haven’t yet collected payment from your business, it’s time to pay yourself a salary. Once you account for that expense, you may realize that your business isn’t quite as profitable or ready for growth as you thought.

7. When there is no reason to leave cash in the business

Leaving cash in the business makes sense when your plan includes growth in some way shape or form, but if you’ve reached a point in your business’s life cycle where you can confidently sustain the desired revenue you want in light of your existing financial obligations, and there’s no investment or business-related reason not to be paid, it’s time to enjoy the fruits of your labor.

Owning a business requires plenty of “sweat equity,” and initially often results in working far harder than you’re being compensated for—and earning less than if you worked for someone else! While that doesn’t mean you have to work for free for the duration of your entrepreneurial life, the best time to take a salary is a unique circumstance that you should determine based on your business’s current financial stability, the goals you have for its future growth, and your own personal financial needs.

What made you determine it was time to start paying yourself a salary? Do you have any advice for other entrepreneurs? Share it in the comments below. 

About the Author Kristen Gramigna is Chief Marketing Officer for BluePay, a leading merchant service provider for small businesses for all their payment processing needs. She has more than 15 years experience in the bankcard industry in direct sales, sales management, and marketing. Read more »

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  • http://www.liveplan.com/ Noah Parsons

    Great post! Thanks for sharing these points.

    I would add that, if you have formed a corporation, there can be advantages to booking “deferred compensation” for the time that you may not have paid yourself at all. This has two advantages. First, this is a bookable expense that can reduce potential profits, even if the company doesn’t actually pay you any cash right away. Second, this creates a record that you should be compensated, even modestly, for the work that you put in during the early days of the company.

    Deferred compensation certainly isn’t required, but it can be a useful tool in certain situations.

  • Markus Bohunovsky

    Arten’t you simply required to pay yourself from the start for tax reasons–depending on the legal business entity you formed? For example, I have run an LLC, an S-Corp and a C-Corp, and at the very least for the S-corp and LLC I am required to book a certain percentage as a salary to myself versus just profit. My CPAs tell me it’s not a choice–unless I want to get audited. (Of course, this is assuming there is any profit to pay out)

    • Judy Tyrer

      Have you gotten a second opinion from a different CPA? My accountant has no problem with me not taking a salary in my LLC. We have no profit yet (we haven’t launched) so that could be the difference.

      • Markus Bohunovsky

        Yes, as long as there is no profit, it’s no “problem”. Although, if you’re the only one working at your business and you take no salary for years, there will eventually be questions from the IRS.

  • Josh Ellis

    Awesome post. I am curious to see how others decided it was time to take a full salary for themselves. I’ve always wondered when the time will come that I can quit the day job that holds me back to focus completely on the growth of my business. Having a new family, it’s seeming more difficult to convince my wife that in order to succeed in the business I need to be more invested and focus on what I think is important. It’s a difficult decision to make and I want to see what others think.

    • khalid

      Josh. Business cant be a part time job. I was in a similar situation that you are in. Can not leave the job because business is not reliable or maybe you do not want yet to take a salary that is compatible to your job’s compensation. But eventually you will be not be fair to your work or business and both will suffer. I left my job had to suffer but things will tend to work out if you do have a good business model. Good luck.

      • KABELI

        But Khalid you cannot just leave the security of your job (especially when you have a new unsupportive family) even before the business shows sustainability. That will be suicide if the business fails. but you are right business can’t be part time” FOREVER” sooner or later you will have to decide which one comes first.

        • khalid

          Set a time table with clear identified signs that show your business has sustainability potential. Be careful if your product is new model there are giants in the market who will copy and can run you out of business over night.

  • Jay Riches

    Forgive my ignorance, but I thought for a good cashflow forecast it was best to include a salary from the start? I’ve included in the 4 year forecast, the capital repayment ie the cost of starting the business +5% annually and in addition my monthly recompense for time and effort given. Is this not the right time ie from the start? that I should be including these figures? The monthly income is positive from day 1.

  • Judy Tyrer

    Thank you. I had been told that investors want to see you pay yourself but I can’t rationalize taking money from one bank account and putting it into another account just so I can pay income tax on it. You have made me feel better about my choice knowing that other investors don’t think like that.