You want to bring in profits to cover your business expenses. But at the same time, you also need to take care of your needs and save for retirement.
Luckily, there are several ways to pay yourself as a business owner. The way you do, it can depend on a few factors, including your type of business structure and your financial situation.
Take an Owner’s Draw
Business owners need help paying themselves. They often focus on priorities like sales, marketing, production, and administration. They may need more time or energy to care for personal finances, so how do small business owners pay themselves?
Fortunately, several ways to pay yourself will be OK with your business and help you keep up with your financial situation. One option is to use an owner’s draw, which allows you to withdraw cash from your business without worrying about taxes and IRS guidelines.
The key to using an owner’s draw is to know when you can and how to manage it. This can be tricky, but if you follow the proper rules and keep track of your expenses, you’ll be able to get your money out when you need it most.
When deciding how to pay yourself, you should consider how much you would be paid for similar work in another company. It’s also important to look at your profits and expenses and determine how much you can realistically take out of your business each month.
Your business structure is the most significant determining factor in whether you’ll pay yourself with a salary or a draw, so consult a tax professional to determine the best way to go about it. A CPA or attorney can recommend the best payment method for your business type and help you make a decision that aligns with your business owner’s goals.
In addition to determining how much you can pay yourself, it’s essential to understand what your business will owe in taxes for the year. For example, if you’re paying yourself a salary, you’ll need to include federal, state, and Social Security taxes in your payroll calculations. You’ll also need to deduct your employer-paid health insurance from your paycheck if you enroll in this benefit program.
Pay Yourself a Salary
The IRS requires owners to pay themselves a reasonable salary if they own a business. This amount must be based on your expenses, but it also needs to keep your company operational. Consider consulting an accountant or tax professional before determining how much you should pay yourself.
The SBA reports that most small business owners pay themselves no more than 50% of their profits, although this is highly dependent on the stage and development of the business. The most important thing is that you need to set your monthly salary so high that it becomes a significant financial strain on the company.
Many business owners take only modest weekly or monthly pay – enough to cover household living costs and a little extra for emergencies, such as unexpected cash reserves that build up in the business account. The rest of the money is left in the business to act as a buffer against lulls in revenue or unexpected expenses.
This method of paying yourself a salary is often recommended for C corps and LLCs, as these structures allow you to deduct your paycheck from your business’s taxable income and pay fewer taxes overall. It also gives you more control over how much money is paid out to you based on your business performance.
You can also pay yourself a bonus that ties to your business growth after break-even. For example, if your company grows net profits by 15% over a year, you should give yourself a lump-sum bonus at the end of that period.
Another option is to take a percentage of your net profits, which can be more appealing if you have an established and profitable business. However, this method can be more challenging to calculate, so it’s worth consulting an accountant or tax professional for advice.
In the end, the key to paying yourself a salary is ensuring that it’s reasonable and not double-taxed. That means calculating your basic personal expenses and then looking at your business numbers to determine a “reasonable” salary. Then, if you’re getting paid too much, consider adjusting your future compensation to reflect a more realistic balance between your personal and business expenses.
Pay Yourself as Needed
It can be tempting to ignore your income, but paying yourself as needed is essential. Having enough cash to cover your expenses is vital for maintaining your mental health as you work long and hard at growing your business.
Before deciding how to pay yourself, evaluating your business’s profitability and financial situation is essential. You’ll want to make sure you can afford to pay yourself a reasonable amount and still cover your bills, says Inc. It’s also intelligent to earmark money for investing, marketing and tax payments.
One way to do this is by setting up an account with a bank and applying for a credit card for your business. This helps you build business credit and protect your finances from personal debt, which can significantly threaten small business owners.
Another way to pay yourself as needed is by paying yourself a salary. This is tax-efficient and an excellent option for C corporations and LLCs. It will allow you to deduct your paycheck from your profits, which can lead to a lower tax bill in the year you receive the payment.
Choosing how to pay yourself as needed can be tricky, though, since it can depend on how your business is structured. Whether you are a sole proprietor, a partner or a corporation, you’ll need to determine how you want to pay yourself and how it will affect your taxes.
You’ll need to review your profit and loss statements, which show how much the business makes in revenue and how much it pays its employees and other expenses. Then, you’ll need to calculate how much of that money is left over after covering your costs.
Finally, you’ll need to figure out how much others make in similar roles at similar businesses. This will give you an idea of how much you should pay yourself based on your experience and skills.
There are many ways to pay yourself as needed as a business owner, and it’s essential to understand all the options to choose the best one for your circumstances. It’s also important to consider your budget and how much you can afford. This will ensure you can keep your business thriving and growing in the future.
