Business Owner? Here’s a 6-Step Guide to Determine your Salary

Feb 28, 2024

Crafting Your Business Owner Salary: A Comprehensive 6-Step Guide

The entrepreneur’s salary—it’s not just a number; it’s a dynamic and multifaceted aspect of running your own business. The yearly question looms large: “What should my annual salary range be?” Creating the right balance between business and personal finances can be difficult.

Here’s a 6-Step Guide for calculating owner pay and a complimentary salary calculator tailored to your unique circumstances.

Step 1: Compute Your Monthly Net Income

Your net income forms the basis of your owner pay calculation. Understanding how to compute net income is crucial to ensuring that your business can meet its financial obligations. It’s a simple equation:

Net Income = Gross Revenue – Expenses

Access your monthly net income by generating a Profit & Loss report covering a monthly period in your accounting software. Opt for an average net income over the past six months to accommodate for quarterly and unforeseen expenses.

Step 2: Determine Your Tax Savings

Effectively planning for taxes is paramount for small business owners. Allocate a portion of your net income towards tax savings, considering at least 30% as a baseline. Consult with your accountant for a more precise figure, especially if you’re in a higher tax bracket or have complex financial arrangements.

Step 3: Account for Business Debt

Prioritize settling your business debts before allocating funds for owner pay. Begin by totaling your monthly minimum debt payments and subtract this from your owner access number determined in Step 2.

Step 4: Establish a Business Savings Strategy

Devise a comprehensive savings plan for your business, earmarking funds for future investments, emergencies, or operational enhancements. Calculate your monthly savings allocation for each goal and subtract this from your owner access number.

Step 5: Evaluate Personal Financial Needs

Conduct a thorough assessment of your personal financial requirements, considering fixed, variable, and discretionary expenses. Determine the minimum cash flow necessary from your business to cover these needs.

Step 6: Refine Your Numbers

Align your owner access number with your personal financial needs. Make strategic adjustments by reallocating resources between business and personal expenses, always prioritizing financial stability and sustainability.

By following these steps, you can simplify the process of setting your business owner salary. Embrace the empowerment that comes from transforming your hard work into meaningful compensation for yourself and your business.

Source: Gusto