Take a salary from my own business? Why?
I hear this pushback from clients all the time, whether they are running a $2M, $10M, or even $50M business.
1. I have all the profits. Why do I need a salary?
2. I can’t afford to give myself a salary!
3. I’ll take distributions to save on taxes.
But here is the harsh truth.
If you can’t take a salary, then you don’t have a business. You have a financial sinkhole waiting to open. And it can get ugly fast.
You must understand the difference between a job and an asset.
A job is when you get paid for the work you do. An asset is something you own that is either appreciating, and rising in value, or producing cash-flow. Owning a business is an asset. Running a business is a job.
Confuse the two, and you’ll mistake a total loss for thriving business.
Imagine the horror when you start hiring staff to replace you and expand, only to realize you can’t afford any more salaries. You’re stuck on the hamster wheel until you redraw your foundations.
Your margins looked so good.
But you forgot to calculate a reasonable salary for yourself. Your earnings were inflated. The margins were artificially increased, disguising a serious problem in your core business model and unit economics.
Don’t wait, take care of it now.
Calculate a reasonable salary for yourself by doing some research and seeing what others are paid for a similar role and comparable hours. Likely, you are wearing more than one hat. Some of the time you work on low-salary tasks and sometimes on high-value tasks. try to make as honest a calculation as you can.
This will reveal your true figures and the true state of your business.
And as for taxes, skipping a reasonable salary is a Red Flag for the IRS. It even spent some time on the IRS’s “Dirty Dozen” list! It’s just begging for an audit.
In the end, neither is better than the other. Owner’s draw is taking the earnings or profits out of a company, salary is calculated before profits. Before you start drawing from your profits, give yourself a reasonable salary so your final profits reflect the true state of the business.
