Bring home the bacon

Bring home the bacon

As an owner, what should you earn and how do you pay yourself?

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November 11, 2014

For about 14 years, Brian DuMont, president of Yard-Nique in Morrisville, N.C., did not pay himself a salary. He took a small regular paycheck and then modest “personal draws” on the company’s dividends. “Being in this business is not about the money,” he says. “I like creating the layers of this business and watching it grow.”

But his accountant of 16 years advised that it was past time to draw a fair salary. Besides, doing so is critical for budgeting. So many owners forget to pencil themselves into general and administrative expenses, and taking “what’s left over” at the end can be dangerous, Jim Huston, green industry consultant and owner of JR Huston Consulting, points out.

The leftovers might exceed what an owner is prepared to pay taxes on or there might not be enough left over to reward a hard-working owner, and then what’s the point of owning a business?

There’s also the responsibility of budgeting for the business while managing personal expenses and focusing on sustainability vs. securing a certain lifestyle. This, too, is where owners can get into trouble if they haven’t budgeted a specific salary, Huston says.

“As business owners grow their companies, those who do not have financial discipline may go out and buy the big house and the big cars and boats, and the next thing you know, they’re in debt up to their eyeballs and you get a recession that comes along and these are the first (businesses) to fall off the cliff,” Huston says.

In DuMont’s case, the money was there; he took modest draws and ensured that the rest of his team was paid and expenses were more than covered. He realized, moving into the multi-million dollar ranks, and currently sitting at $16.7 in revenue, that this practice was not fair to the business, or him. So, he researched fair salaries for CEOs of a business his size and decided on a number, which he plugs into the annual budget.

“We have a lot of big salaries at our company, and it’s a constant struggle we focus on as we get larger and expand: How do we continue to watch the bottom line?” DuMont says. “The positions we have today are big dollar amounts on the bottom line: the COO, CFO, HR director and my own salary.”

But how much is enough, or too much, to pay yourself? And what fringe benefits can an owner claim?
 

Calculating your salary

Determining how much to pay yourself is tricky, says Rudy Larsen, president of Lawn Butler in Centerville, Iowa.

“At the end of the day, I see what I get paid as an employee and as an owner as different,” he says.

Larsen is referring to his direct salary that comes from the budget versus dividends he takes from the company’s bottom line as an owner’s draw.

Expert Tips

Look beyond the checkbook. Owners who write themselves a paycheck based on what’s in the company checking account could get in big trouble. This is sometimes a problem with sole proprietorships, where business dollars are spent on household groceries and other personal expenses. The owner, or spouse, may see money in the business checking and figure it’s available for use. In fact, that cash could be “claimed” already for expenses – or payroll taxes down the road.

Figure in payroll taxes. If you neglect to budget your own salary and instead pay yourself “when you can” or when you need it (however often that is), your payroll tax obligation could be an unpleasant surprise. “If you go through the year putting money into your pocket, you could end up with a huge tax bill at the end of the year because you haven’t set enough aside for payroll taxes,” Huston says.

As for his salary, Larsen looked at other businesses his size – companies in the $5 to $10 million range – and learned that CEOs make about $120,000 to $130,000 plus benefits.

“I look at it as, if I was going to hire someone to do the job of president, how much would I be willing to pay him or her?” Larsen says. “How important is the role of managing my company?”

Larsen admits that he probably pays himself more than what another company would pay him, but that includes draws on dividends. “I only put as my salary what I would pay someone else in the budget, and everything else comes out of the bottom line,” he says.

Huston says there is no set percentage benchmark for determining an owner’s salary. Indeed, the place to start is by asking yourself: What would I pay someone else to run this business?

Huston offers these monthly salary guidelines for companies of various sizes. These figures do not include benefits such as health insurance, retirement savings or vehicles.

  • $300,000 revenue: monthly base salary of $3,000 to $4,000; year-end bonus on dividends of $12,000 to $24,000
  • $600,000 revenue: monthly base salary of $4,000 to $6,000 ($5,000 average); year-end bonus on dividends of $24,000 to $36,000
  • $1 million revenue: monthly base salary of $6,000 to $8,000; year-end bonus on dividends of $48,000 or more
     

“As the company gets larger, your percentage (salary as a percentage of the overall budget) goes down,” Huston says. “If you are not making at least $36,000 plus dividends, you’re probably asking, ‘Why am I doing this?’”

And, Huston adds, if this low salary is the case, “There is probably something seriously wrong in the operation as far as your profitability.” Perhaps you’re bidding/pricing is too low and you are not properly recovering your costs, therefore degrading profit margin and leaving little left to draw on as a bonus or salary.

“At the end of the year, with a 10 percent profit margin, if I’m doing $600,000 in revenue and I have $60,000 at the bottom line, as the owner I’m going to take a chunk of that (as a bonus) and put it in my pocket,” Huston says.

The problem is, because profitability varies so greatly among landscape firms, some owners are making much more than the average while others are barely scraping by. Huston illustrates another example of taking an owner’s draw from the bottom line profit.

“If you are getting at least 10 percent net profit margin on $1 million revenue, that’s $100,000,” he says. “I might take almost half and put that in my pocket, and the other half will go into capitalization or retained earnings.”

Always review salary plans with an accountant and discuss tax strategy, Huston says. “At the end of the year, you might not want to take out any dividends if you don’t need the money,” he says, noting how one’s tax position can be impacted, which is why involving an accountant is critical.
 

Accounting for ‘extras’

Beyond salary and bonuses from the company’s dividends, the business also pays for an owner’s health insurance, just as it would other eligible employees. Other fringe benefits include expenses for meals and entertainment, along with travel, Huston says.

Another benefit and revenue generator is rent for facilities, Huston says. “A lot of times, business owners will pay themselves rent for the facilities that they own,” he says. “Real estate is an area where many of my clients make money.”

Huston generally advises clients to invest in property and let the business pay for it.

Also, owners can establish educational funds for their children and set up retirement accounts, including 401(k) or Simplified Employee Pension Plan (SEP) IRA.

Again, Huston urges owners, “Be sure to talk to your CPA regarding your specific situation.”