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Understanding "Excess" Pay for Small Business Owners: Your Questions Answered

As a small business owner, it's important to know about "excess" pay and how it can affect your business's financial health. In this article, we'll explain what excess pay means for small business owners in simple terms and answer some common questions you may have using everyday examples.

  1. What is Excess Pay? Excess pay happens when small business owners pay themselves or take out more money from the business than what is considered fair and reasonable. It means receiving a salary or profits that are much higher than what others in the same industry typically get for similar businesses.

  2. How Can I Tell if My Pay is Excessive? To check if your pay may be excessive, consider these points:

  • Compare with Others: Look at what other small business owners in your industry and area are paying themselves. If your pay is significantly higher, it might be considered excessive.

  • Consider Your Business's Finances: Think about how much money your business is making and whether your pay is reasonable based on that. If your pay is eating up most of the profits, it could be excessive.

  • Look at Your Effort and Responsibilities: Consider how much work and effort you put into your business. If your pay seems way higher than what you'd expect for someone doing similar work, it might be excessive.

  1. What are the Risks of Excessive Pay? Excessive pay can lead to some negative outcomes, such as:

  • Financial Strain: If you pay yourself too much, it can strain your business's finances. You might not have enough money left for things like expanding the business or dealing with unexpected expenses.

  • Business Viability: If your pay is excessive, it can make lenders, investors, or potential buyers doubt the financial stability of your business.

  • Perception and Fairness: Paying yourself too much can create a perception of unfairness among employees, customers, and others. It might affect their trust in your business.

  1. How Can I Make Sure My Pay is Reasonable? To ensure your pay is reasonable, try these steps:

  • Do Some Research: Look into what other small business owners in your industry and location typically pay themselves. This will give you an idea of what's considered fair.

  • Get Professional Advice: Consider talking to an accountant, financial advisor, or small business consultant. They can provide guidance on what's reasonable for your industry and help you make informed decisions.

  • Think about Your Business's Needs: Consider the financial situation of your business and its future goals. Aim for a balance where you can pay yourself fairly while leaving enough money for growth and emergencies.

Example: Let's say you own a small bakery. If you find out that other bakery owners in your area typically pay themselves around $60,000 per year, but you're paying yourself $120,000, it's worth considering if your pay is excessive. You might want to adjust it to be more in line with what others in your industry are doing.

Understanding excess pay is important for small business owners to ensure their businesses stay financially healthy and fair. By comparing with industry standards, considering your business's finances, and seeking professional advice, you can determine a reasonable pay for yourself. Finding the right balance between fair pay and the long-term success of your business is key.

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