Sizing Up Your Salary

According to a recent Gallup poll, an enviable 94 percent of small-business owners consider themselves to be successful.¹

So how should successful business owners determine an appropriate salary that is in line with their work, but won't damage the future health of their companies?

Even the owners of thriving businesses must consider more than their lifestyle preferences when deciding how much to pay themselves each month. Here are a few key issues that are likely to influence your compensation package.

	Taxes —The way a business is structured affects how the IRS taxes the owners compensation. With a C corporation, company profits are taxed at the corporate rate, and the owner's salary may be deductible. Therefore, the amount should fall within a reasonable range that is in line with the owner's duties and published salary benchmarks. With sole proprietorships, general partnerships, LLCs, and most other forms of ownership, all business profits are considered earned income and taxed at the owner's personal tax rate.
	Retirement Savings — Depending on how your business is organized, you could enjoy tax benefits when you forgo some salary and contribute to qualified retirement plans instead. In some cases, business owners are eligible to save up to 25 percent of their earned income (within limits) and reduce their tax burden at the same time. Owners may also use their profits to fund benefits such as life, health, or disability income insurance for themselves and their employees.
	Growth — When profits are up, it's tempting to take home a larger piece of the pie, but it may also be time to assess the potential for expansion. Reinvesting earnings in business real estate or facilities, modernizing equipment, or intensifying marketing efforts could eventually result in even larger future profits.

To avoid poor financial decisions made in a moment of desperation, businesses should also have reserves to cope with temporary periods of higher-than-expected operating costs or slower sales.

To help ensure lasting business success, it's important to make financial decisions based on what is best for the company first. Then you will be in a better position to address how the business can impact your personal financial situation for the years to come.

1) The Gallup Organization, 2005

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