For many small businesses and farms, the farmer or business owner provides a lot of the operating labor for the business/farm. In many cases, the owner or farmer is putting a lot of sweat equity into the business to make it grow and to ensure all operations and tasks are performed. However, it is not uncommon for a farmer or business owner to not pay themselves a wage/salary and just pull money out from the business when they need it.
Farmers and business owners should consider paying themselves wages for the following reasons:
Cost of Replacement: If the farmer is paying themselves a fair wage for the time they put into the farm, then the cost of their labor is factored into the operation. This reduces farmers’ risk by ensuring that they can pay someone if they have to hire someone to replace themselves if they have an accident.
More Accurate Depiction of Expenses: If key labor expenses are not included, then expenses are underreported and unaccounted for in the financial reports of the business. This makes it very difficult for the farmer/owner to have a clear understanding of the profitability of the business. The profitability of the business can be inflated if there is no compensation for the owner’s time.
Allows for Growth: As the business grows and needs to hire additional labor, it is easier for the business to absorb these new labor costs if it has already been paying the owner for duties that will be performed by new employees. Additionally, it makes it easier to plan for the necessary cash flow if the owner is paying themselves.
Tax Purposes: Depending on the organizational structure of the business, farmers and business owners can reduce their tax liability in some cases by paying themselves. Farmers and business owners should consult their CPAs or tax advisors to see if this would be beneficial to them and how best to do it.
If you have questions about employee wages or your financials, contact KCARD at (859) 550-3972 or kcard@kcard.info. We’re happy to help!