How Should Business Owners Give Themselves a Raise?
When you’re a small business owner, you don’t have anyone overseeing you, giving annual performance reviews and making sure you’re fairly compensated for your work. While most people could probably do without the reviews, everyone wants to be paid what they deserve. Determining compensation and raises for yourself can be a difficult task for a business owner. How should business owners give themselves a raise? Here are a few things to consider.
Business Classifications and Taxes
Is your business a sole proprietorship, a partnership, an LLC, or some other classification? This could impact the way you choose to pay yourself. For example, the business owner of a sole proprietorship or a partner in a partnership can draw income from the company without the company being taxed for that money as income.
In most situations, a small business owner is a W-2 employees of the company, meaning that they receive a salary on which they are taxed. If you file a W-2 as a business owner, you have to be careful to pay yourself a reasonable salary; pay yourself too little and the IRS will suspect you’re up to something to avoid paying a large tax bill, but pay yourself too much and you could incur large tax penalties.
Additionally, small business owners need to be mindful of tax brackets when increasing their pay. Giving yourself a raise could bump you into the next bracket – Doing so might not be worth the impact on your personal taxes.
It’s ideal to consult a business accountant to discuss the best way to pay yourself given the classification of your business and your personal financial needs.
How Much Can a Business Owner Pay Themselves and When?
Some small business owners choose to give themselves a salary boost when the rest of the company is undergoing a review cycle. That can be a good time to reflect on pay across the board. You can choose to reward yourself with a percentage increase based on the overall performance of the company, or you can decide to raise your pay based on your personal performance and hard work during the time period in review.
Other business owners will reward themselves when performing quarterly/annual financial reporting. In this case, the business owner usually bases their pay increase on the company’s performance. For example, if the business saw a 10 percent increase in revenue for the year, the small business owner might give himself a 10 percent pay raise.
While some business owners pay themselves a salary dispensed at the same regular pay periods as the rest of the company, others choose to take a lump sum either quarterly or annually. It’s also an option for small business owners to reward themselves with a sum after a large deal is closed or another milestone of that nature. Again, there can be tax implications for any of these choices, so consult with an accountant to determine which option is best for you.
How a business owner chooses to give themselves a raise is a complicated matter with options varying widely by the business classification of the company and the potential influence on personal and business taxes. If you’re ready to increase your pay and take your business to the next level of growth, consider a small business loan.