Owner’s compensation refers to the financial remuneration and benefits that a business owner receives for their direct contributions to the management of their business. These are often treated as W2 wages with their capital investments and distributions reflected in Owners’ Equity on the Balance Sheet.

Primary Implication

One of the driving reasons business owners fail to earn a living wage from their business is their failure to factor in a fair wage for their time and skills in the prices they set for their products and services.  Until they fix this mistake, they will never make the money they want, let alone deserve, in return for their hard work and sacrifice.

Overview

While knowing how much a business earns in profit is vital knowledge for every business, no matter its size—many small business owners fail to account for the value of their time adequately in their costs of doing business.  Most often, this occurs through a failure to account for the personal labor they put into providing their customers with a service or product at a reasonable price.  They neglect to place a cost per hour on the value they should be paid for their time and skills.

The wages, benefits, bonuses, and payroll taxes a business owner pays themselves for the work they perform in the business should be reported as W-2 income.   This is the surest way they include their wages in the prices they charge and the cleanest way to ensure they pay themselves a living wage.  These business costs are separated from Direct and Office Payroll because every owner is the last “employee” to get paid.

Put another way, if there is no Operating Income, there is no money to pay yourself.  As a result, the wages paid to owners should be included after reporting Operating Income.

Owners’ Compensation does not include equity distributions or owners’ draws.  These are Balance Sheet transactions reflective of the business owner, whereas the wages they take for the work performed should be treated as a cost of doing business.  I.e., if you have a working owner they should pay themselves as they do an employee because the business relies on their contributions.  If the owner doesn’t perform work in the business that contributes to sales and profits and is infrequently in the business, they should not be paid wages.  They are investors who earn their money from the business through equity distributions nos wages.

When assessing this result, the key is to look at the dollar difference between what you consider a fair wage for the work you do and what you are paying yourself. If you find this amount acceptable then keep your focus on converting sales into profits that build cash reserves.  If unacceptable, identify what you will do differently to pay yourself the money you should be paid.