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small business owners pay yourself

Small Business Owners: Pay Yourself!

If you’re a small business owner, you need to pay yourself.

This seems like a commonsense statement. Everyone who works deserves to be paid. However, small business owners have a tendency to not only give too much of themselves to the cause, but to take far less back than they deserve.

Consider a 2019 survey from Kabbage that showed 51% of 500 entrepreneurs who responded said they purposely did not take a paycheck so they could help out their own businesses. Specifically, 26% went between two and six months without paying themselves, while another quarter of respondents went longer than six months without a paycheck.

Since then, it’s likely even more small business owners went this route as they tried to keep their companies afloat during the COVID-19 panic.

While it’s easy to understand why small business owners sacrifice so much for their small businesses, going to those lengths can have some extremely deleterious effects. Especially as the world returns to normalcy, small business owners need to re-evaluate their own compensation (or lack thereof).

Read on as we discuss the downsides of not paying yourself – and, once you’ve seen the light, the ways in which you can do so.

Why Small Business Owners Should Pay Themselves

Largely speaking, there are three reasons why any small business owner should remember to take their cut. If one doesn’t speak directly to you, another one should.

  • You can’t work if you can’t eat: We’ll start off by being blunt – if you can’t eat and get a good night’s rest under a solid roof, you’re probably not going to be 100% as you operate your business. You’re a human being first and foremost, which means you have basic needs that must be met to perform at your best. This goes for anyone working a job, but especially for someone trying to wear the many hats that small business owners do.
  • It’s a positive sign to investors: Investors in your company want to ensure that you’re running a business, not just an expensive hobby. Sure, not paying yourself shows that you’re committed to whatever it takes to make the business survive – but perhaps you’re demonstrating that the business can’t survive under normal circumstances.
  • The “squishy” reason: Studies frequently find two factors are more important than most when it comes to employee morale: pay, and employee benefits (which are effectively another form of pay). In short, you’re giving yourself a subconscious incentive to work hard, and work well.

The Ways You Can Pay Yourself

We tackle the topic of how to pay yourself as a small business owner (which depends on what type of business you own) in more depth here. But in short, the two primary ways that small business owners get paid are “salaries” and “owner’s draw.”

  • A salary is exactly what it sounds like. You set a specific wage for yourself, then cut a corresponding check for yourself every pay period.
  • An owner’s draw is simply when you pull money out of the business for yourself. This can be done routinely, but it doesn’t have to be.

How much you should pay yourself is a different question altogether, and one whose answer varies from business to business. But in short, the answer is that you should pay yourself enough to at least take care of your most vital needs without compromising the company’s ability to operate.

How to Make Sure Everyone Gets Paid

If you’re a business owner and you’re trying to figure out who gets paid, and how, and how much, we can help.

McManamon & Co. is an accounting, tax, fraud, forensic and consulting firm that specializes in small and midsize businesses. And among the topics our professional consulting services can tackle is employee compensation — whether it’s figuring out how to get you paid, or how to get payroll sorted out for your staff.

Get your small business’s finances in order. Call McManamon at 440.892.8900 or contact us online today!

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