Many small business owners are hesitant to take a salary, especially in the first few years. Considering all the bills to be paid, taxes, employee payroll, health care, and many other business expenses, it can be hard to hard to find the best way to pay yourself as the owner.
Even if you’ve been in business for years, you might still have doubts about how to pay yourself as a business owner. You may come on with dilemmas such as, “Should I have a salary, or take payment in the form of owner draws?”, “Am I making enough money from my business?”, “Maybe I’m taking out too much?”, “Where should my payments be showing up in my business finance records?”
These and many other questions may have been in your head for a while. Now it’s time to answer all of them!
Paying Yourself as a Business Owner.
It’s important to know whether you’re an LLC, sole proprietor, or corporation since that will affect how you take payments and how you’re taxed on that pay. It’s important to mention that, if you’ve never done anything to set up a specific business structure, that means you’re considered a sole proprietor.
Sole proprietorships, partnerships, S corps, and C corps all have different rules about how their owners, members, or shareholders are paid—and taxed. Read more to understand the different types of business entities and their legal structures: Sole Proprietorship vs. LLC or Corporation.
Let’s look at the different ways you can pay yourself:
How to Pay Yourself as an LLC.
If your business is an LLC, you can pay yourself as the owner in a couple of different ways. It all comes down to your underlying tax structure. An LLC can have the tax structure of a:
Partnership or sole proprietorship, where you simply draw cash from profits
Corporation, where you pay yourself a salary (and probably top it up with dividends from profits)
This means that you pay yourself depending on your tax structure - sole proprietor, partner, or corporation.
How to Pay Yourself as a Sole Proprietor or Partnership of Your Business.
This is very straightforward. As a sole proprietor and/or partner, you pay yourself simply by withdrawing cash from the business. Those personal withdrawals are counted as profit and are taxed at the end of the year. Always remember to set aside a percentage of earnings in a separate bank account throughout the year so you have money to pay the tax bill when it’s due.
How to Pay Yourself as an S-Corporation or C-Corporation.
Owners of corporations usually pay themselves a salary, which works the same way as with a normal job. The salary will be shown as an expense on the business books and the owner pays personal income tax on it. It’s common for owners of smaller corporations to take a modest salary and top it up with dividends from profits.
How Much To Pay Yourself.
Defining the amount you pay yourself has to be a balanced amount between what your household requires and what your business needs
What Your Business Needs.
You need to remember to always have enough so you can cover the businesses’ important expenses, as well as rainy day funds and reinvestments:
Expenses: Keep a list of what your business owes and when it’s due so you don’t draw too much from the business at the wrong time. Also, keep some money aside for taxes too.
Rainy day funds: It’s always healthy to save some cash to ride out any business disruptions. A sensible amount usually should cover 30, 45, or 90 days worth of expenses.
Reinvestment: Additionally, hold onto some money for any developments and improvements of your business. This can be new work tools, hiring new staff, or even a marketing campaign.
What Your Household Needs.
As you probably already know, your household budget needs to cover day-to-day living expenses, as well as any debt repayments, such as mortgages and/or car loans. Additionally, you have to consider any insurance and retirement funds, which your employer may have managed before you went out on your own.
If your finances are not strong enough or you are just not paying yourself, that may put you at a disadvantage when seeking small-business financing. Check if you pre-qualify for working capital here.
Invest in Business Growth to Pay Yourself.
Perhaps your primary concern is not paying yourself a salary – instead, you need funding for your business. Unfortunately, small business owners rarely qualify for bank loans, their application process is complex and demanding, and the requirements- strict. You may not have the time, know-how, patience, or credit history to qualify for the same financing options designed to meet the needs of big businesses.
One easy way to get the process started is by getting pre-qualified by One Park Financial, a company focused on helping owners of small and mid-sized businesses access funding.
Click here to get pre-qualified in less than 2 minutes.
Disclaimer: The content of this article is based on the author’s opinions and recommendations alone. This material has been prepared for informational purposes only. It is not intended to provide and should not be relied on for tax, legal, or accounting advice. We suggest consulting with your tax, legal, and accounting advisor before engaging in any transaction.