Thread: Determining salary.

How do you determine your salary drawn from your business? Is it a factored percentage or a fixed dollar amount based on what you think you're worth?

Well it really all depends, if you have a partner then each partner will get a set salary and then split the rest based on the ownership percentage, if you are the only stake holder then the business income might not be steady so I would pick an average so if the company makes less one month it can be compensated by another month that the company makes more.

Completely depends on your entity/tax structure.

Sole props and partnership income flows through to the owner/partners so there is no salary.

With S or C corporations, its a split between salary and dividends (C-Corp) or distributions (S-Corp). I don't have any experience with C's, but with S-Corps, you usually want to take the lowest possible "reasonable" salary and maximize distribution income to avoid ~15% Self Employment taxes.

Originally Posted by RAWMEAN

if you are the only stake holder then the business income might not be steady so I would pick an average so if the company makes less one month it can be compensated by another month that the company makes more.

I'm the founder/owner and there are no other vested interest other than my own. Your description makes sense.

Originally Posted by Spencer

Completely depends on your entity/tax structure.

Not really. The tax structure doesn't make a difference what your pay is, since you will either get it in salary, dividends, or draws. Taxes are of little consequence, be it 100% salary or combination of salary and dividends/draw/distribution.

What I'm asking is how did you figure the amount you pay yourself is the amount you DO pay yourself? Let's say you pay yourself $50,000. Why $50K? Is that percentage based on profit just comes out to that number or is that what you need to make in order to pay your personal bills? That's what I'm asking.

salary?.. what salary?

Originally Posted by tubby

I'm the founder/owner and there are no other vested interest other than my own. Your description makes sense.


Not really. The tax structure doesn't make a difference what your pay is, since you will either get it in salary, dividends, or draws. Taxes are of little consequence, be it 100% salary or combination of salary and dividends/draw/distribution.

What I'm asking is how did you figure the amount you pay yourself is the amount you DO pay yourself? Let's say you pay yourself $50,000. Why $50K? Is that percentage based on profit just comes out to that number or is that what you need to make in order to pay your personal bills? That's what I'm asking.

It actually means quite a bit depending on how you are setup. You don't really have a choice as a sole proprietor or in a partnership arrangement, but in a corporation, you can tailor your W2 salary to save a bundle on other tax liabilities, specifically capital gains rates. Just look at how cap gains are taxed at different ordinary income brackets.

Sounds like you're referring to pulling cash/equity out to cover personal expenses. Generally most self employed people I know leave cash in the business, and transfer it out to cover personal expenses when needed.

Originally Posted by Spencer

It actually means quite a bit depending on how you are setup. You don't really have a choice as a sole proprietor or in a partnership arrangement, but in a corporation, you can tailor your W2 salary to save a bundle on other tax liabilities, specifically capital gains rates.

Sounds like you're referring to pulling cash/equity out to cover personal expenses. Generally most self employed people I know leave cash in the business, and transfer it out to cover personal expenses when needed.

bingo. I havent had a salary in this business yet. but then again the ranching business is very unique. you live where you work. and our tax liabilities, and what we are taxed on or not is quite different than most other businesses out there.

You really need a good CPA to advise you on this. A good business CPA is a major plus when you are self employed. I pay myself a small salary, then the rest in dividends. I try to charge as much as possible to the corp, so the corp deducts it as an expense. This is why you need a good cpa. They can advise you on what you can run through the corp.

Originally Posted by Spencer

It actually means quite a bit depending on how you are setup. You don't really have a choice as a sole proprietor or in a partnership arrangement, but in a corporation, you can tailor your W2 salary to save a bundle on other tax liabilities, specifically capital gains rates. Just look at how cap gains are taxed at different ordinary income brackets.

Yup I understand all of that but that's not the focus of what I'm trying to get at. For purposes of this discussion, taxes aren't on the radar.

Sounds like you're referring to pulling cash/equity out to cover personal expenses. Generally most self employed people I know leave cash in the business, and transfer it out to cover personal expenses when needed.

Yes, like a paycheck. Call it whatever you want to call it, but the money you pay yourself for personal living expenses is what I'm talking here.

Originally Posted by Bignmz04

bingo. I havent had a salary in this business yet. but then again the ranching business is very unique. you live where you work. and our tax liabilities, and what we are taxed on or not is quite different than most other businesses out there.

Neither have I, but when it comes time to draw a salary/paycheck, I'm lost as to how much to pay myself.

Originally Posted by khaiser

You really need a good CPA to advise you on this. A good business CPA is a major plus when you are self employed. I pay myself a small salary, then the rest in dividends.

Yes I have a CPA. Now the bold part is what I'm talking about. OK so that total salary comes up to a dollar amount. Why THAT dollar amount? Was that figured :

1) as a fixed dollar amount you figured would be nice to get paid
2) as a fixed percentage of profit (5%, 10%, etc)
3) that's what you made at your last job before your business so that's your starting point

That's what I'm trying to figure out. I'm getting frustrated at not being able to articulate well enough to get the answer I'm seeking. I don't give a damn about taxes for salary purposes. I really don't and the thread is getting distracted by its discussion. I don't need some long ass answer about SET avoidance by deferring taxes to the corporation, blah, blah, blah, I get it. That doesn't answer how you figure to pay yourself $30K salary.

A.) Simmer, people are trying to help.

B.) I don't think it's that difficult. If your business is profitable, which I hope it is to be asking this question, then you know how much your business makes.

If you are in the fortunate position that you net some incredible $ then for sure, add up what your monthly cash flow needs are to live comfortably and there you have it.

If you're running close to the wire then you obviously need to take a different approach. Trim the fat, determine your most basic needs, and maybe withdraw for extras as needed. You don't want to pay yourself too much as you may have slow months, etc.

It's really dependent on your business. There are so many factors. Is it seasonal? Do you have alot of cash flow fluctuation month to month or is it fairly predictable? Have you completed a fiscal year to know what to expect? Have you been running for multiple years?

As a sole prop which is sounds like you are you obviously need to cover expenses. You don't want your personal credit to be destroyed because you decided to hoard money in your business, but at the same time you want to grow the business as much as possible/needed when there is money to spare.