When you are starting a new business, it can seem impossible to meet all of your expenses. You’re just now getting the word out about your new company. Clients are probably thin on the ground. You may plan to undercut your competitors to get your foot in the door, and that trims your budget even more.
Should you refuse a salary, at least for a while, while you build your business? You may be able to live for a while on savings or your spouse’s salary. You’ll have plenty of opportunity to reap the benefits of success later, right?
You might want to rethink the issue. For one thing, it could affect your taxes. The IRS directs business owners to pay themselves a salary commensurate with their responsibilities. If you significantly underpay yourself, the agency may adjust the income and expenses on your tax return.
Perhaps as important, you should probably reconsider low-balling your rates on the market.
Does your pay reflect your value?
Many new business owners underprice themselves. They are often hoping to get clients, build a portfolio and garner some referrals. So, they take on big projects at low rates or agree to projects they don’t actually like, but which pay.
Consider the opportunity cost of taking jobs you don’t want. You may be assuming that an undesirable job is better than no job at all. However, dedicating yourself to an undesirable or underpaid job also comes at the expense of the work you really want. If you’re consistently working those undesirable jobs, you won’t have time for the fun, well-paid jobs.
Consider pricing theory, as well. When you agree to work for a noticeably lower rate than others in your field, your clients may think you’re not worth as much as your competitors. Your clients could devalue you.
More practically, clients who pay rock-bottom rates may waste your time on needless rework simply because it isn’t costly to do so.
Ultimately, you may miss out on clients if you pay yourself a market rate, but are they the right clients?
Leigh Law Group helps business owners start, build and operate their companies profitably.