Determining a Fair Salary for Minimal Time Investment in an E-commerce Business
As an entrepreneur running an e-commerce venture classified as an S-corporation, the question of how much you should pay yourself can be quite perplexing. With approximately $150,000 invested in inventory and the business requiring an average of just two hours per week to operate, arriving at an appropriate salary is crucial for legal and financial clarity.
Minimal Time Commitment:
My business demands a minimal time investment, consisting of about five minutes per order to package items and drop them into the mailbox, and up to 15 minutes weekly on transaction categorization. Aside from these tasks, my professional obligations extend to annual or biannual meetings with my accountant.
Current Financial Structure:
Presently, I’m maintaining a modest monthly salary of $300, essentially to meet the S-corp requirement of a reasonable compensation. I’ve opted not to draw any distributions, choosing instead to reinvest profits into expanding my inventory.
Considering Changes:
With plans to potentially liquidate a significant portion of my current stock, I’m anticipating the shipment of around 100 packages this year. By comparison, last year saw the shipping of 112 packages. These shifts call for a reassessment of how I determine my salary and manage business finances.
Calculating a Reasonable Salary:
To establish a reasonable salary, I am examining various factors such as the time spent on business activities, the profitability of the business, and IRS guidelines for reasonable compensation in an S-corporation. It involves striking a balance between a defensible salary and optimal distributions, keeping in mind the strategic aim of reinvesting to nurture business growth.
Arriving at the right figure demands careful consideration and perhaps consultation with a financial advisor. By doing so, I can ensure compliance and business health while allowing personal financial benefits.
One Comment
This is an intriguing discussion on determining a reasonable salary, especially in the context of a low time commitment and the S-corp structure. It’s essential to remember that the IRS requires S-corp owners to pay themselves a “reasonable salary” based on what similar businesses in your industry might pay for similar work. Given your minimal time investment, benchmarking against industry standards can help you justify your salary if audited.
In addition to just the hours worked, consider the value you’re delivering to your customers and the ongoing growth potential of your business. Since you plan to liquidate stock and are focused on reinvesting profits, a strategic approach might be to gradually increase your salary as revenues grow, ensuring it aligns with your business milestones. This not only satisfies IRS mandates but also reflects your evolving contribution to the business.
Moreover, consulting a financial advisor can provide insights beyond compliance — they can help structure your finances in a way that optimizes both salary and distributions, which is crucial for maintaining cash flow and supporting further business investment. A thorough review of your performance metrics alongside these conversations may guide you to set a reasonable salary that reflects not just the time commitment but the overall health and aspirations of your e-commerce venture. Looking forward to seeing how this evolves!