3 Reasons to Give Yourself a Raise

Part of the allure of owning your own business is setting your salary. You’re not beholden to a boss who tells you what your cut of the profit is – when you’re the boss, you make the call.

As many small business owners have found, deciding what to pay yourself is not always easy. Faced with myriad labor and capital costs, as well as pressure to make the business profitable, owners may choose to “pay themselves last,” scraping by on below-market wages or living off of personal savings.

If that sounds like your predicament, consider paying yourself what you’re actually worth. That might be what your competition pays, or the amount you’d need to pay the right candidate to take over your job. Whatever the number, here are three very good reasons to raise your salary.

A Fair Salary Keeps You Honest about Business Success

You probably started your business for many reasons, but making money was almost certainly one of them. While that goal requires a profitable business, you’re not being honest with yourself or your investors if your profitability comes at the expense of a fair salary. Paying yourself fairly helps you to honestly confront the state that your business is in.

After all, you don’t want to pay yourself a pittance in perpetuity. Your low pay hurts your ability to save for retirement and provide for your family. If you’re forced to take a below-market salary for years just to keep your company afloat, you need to do an honest assessment of the state of your business. You might believe you’re bootstrapping the next Facebook when in reality you’re subsidizing a sinking ship.

A Fair Salary Keeps You Focused

The more you value something, the more careful you’ll be about how you use it. That’s especially true of your own time. Paying yourself the rate you deserve allows you to value your time appropriately and make effective decisions about what to do yourself and what to delegate to others.

Any good business owner will ensure that their employees are performing at a level commensurate with their salaries. The same principal applies here, except in this case, you are both the owner and the employee. Do you really need to be stuffing envelopes, or should you be making sales calls? If your time is one of your company’s biggest expenses, you’ll be more likely to spend it wisely.

A Fair Salary Helps You Sell The Business (If and When You Want To)

You might not want to run your business forever. Think about how your business will look to prospective buyers when it comes time to sell.

If your business can only succeed if the owner takes a meager salary, no one will be interested in buying it. Would you want to buy a “profitable” carpet cleaning business if the owner worked 80 hours a week but only made $15,000? We didn’t think so. Include a fair salary for yourself in the business balance sheet as soon as possible, and you’ll be in a much stronger position if and when you want to sell.

If You Just Can’t Afford It

There are some valid reasons not to pay yourself a market rate from Day 1. Many businesses bootstrap their operations for a bit, and if you start out with high labor or overhead costs, it might be best to work up to a market rate more gradually. You can increase your salary as the business grows, or reevaluate once you break even. Make a plan and stick to it until your salary is fair.

Tax Implications

You’ll also want to consider the tax implications of setting your salary. Depending on how your business is structured, taking out too much compensation or leaving too much in the business might have implications with the IRS. Talking with a financial advisor can help you make the right choice for your personal situation.