When it comes to starting a business, one of the furthest things from your mind (in the beginning stages, at least) is paying yourself. From the long ever-growing list of expenses to hiring employees, paying yourself may seem truly impossible. However, it is not only possible, but it is something that you deserve. So how do you decide on a number? Or how to get paid? That’s what we’re here to help you figure out.
The Two Types of Payment
There are two different types of ways to pay yourself. We’re going to break it down, so you can understand which one is the better option for you and your business structure.
Like with any other company, the first option is to pay yourself a base salary, withholding taxes from your paychecks. If your business is classified as an S-corporation, C-corporation, or limited liability, you are legally required to pay a salary. Beyond that, the IRS has a compensation requirement that states that your salary should be comparable to others in your industry.
Pros of salary:
- Stable income
- Recurring expense for your budget
- Taxes are withdrawn
Cons of salary:
- No flexibility (due to compensation requirement) when business is bad
Owner’s draw offers a much more flexible approach to getting paid. With it, you draw money in regular intervals or on an as-needed basis. Unlike salary, taxes are not deducted from the draws, so it’s smart to set some money aside for tax season.
Pros of owner’s draw:
- You can withdraw based on your business performance
Cons of owner’s draw
- Taxes are not deducted
- Reduces business capital
How To Pay Yourself As A Small Business Owner
There are a few things that will help you determine how to pay yourself and whether salary or owner’s draw is the best option for your business.
As mentioned earlier, your business structure is one of the biggest determining factors. If you are an LLC, C-Corp, or S-Corp, a salary is required. However, if your business is classified as a sole proprietorship or partnership, you may have a little more flexibility. To get a better understanding of the taxes for your business classification, check out this IRS breakdown.
Your Business Success
Many small business owners do not pay themselves in the beginning–which we understand! But the minute you begin to see any sort of success, and you feel confident in your business’s future, start considering giving yourself a paycheck. The earlier you think about it, the easier it will be to add it to your business expenses.
Related: 8 Easy Ways To Cut Business Expenses
Lastly, think about your personal finances. The amount you give yourself should cover your expenses such as mortgage, rent, car payment, insurance, etc. Gusto put together a great guide that can help you figure out the number that is perfect for you.
Figure Out A Schedule
So you finally figured out your tax requirements and what option is best for you and your business structure. Now what? Setting up payment! If your business has at least one employee and uses any payroll system, you need to add yourself to it. Think about how often you want to receive a paycheck. While the most popular is bi-weekly, you can also opt for twice a month or weekly.
To make the scheduling aspect easier, use this calendar created by the Department of Labor. With it, you can determine what the minimum number of payments is for your state. Keep in mind that you can always pay yourself more than this number, just not less.
Mistakes To Avoid When Paying Yourself
Not having separate bank accounts
The biggest mistake to avoid is mixing personal and business accounts. Always keep them separate. Using a business credit card or neglecting to send your owner’s draw to your personal account can lead to accounting issues down the line. It can also seriously hurt your chances of getting a small business loan, should you want to apply for one.
Related: 8 Money Mistakes Small Businesses Make
Forgetting about taxes
Because no taxes are deducted in an owner’s draw, you will owe come tax season. The rule of thumb is to always set aside 25%-30% of your income for taxes. You also have to pay taxes quarterly, so using an accounting firm or software is most likely going to be your best option. They can help you avoid getting hit with a massive bill that you can’t afford.
Not paying yourself
If there’s one thing that you should take away from this, it’s that not paying yourself is a mistake. Whether you’re in the planning stages of your business or it’s been up and running for a while, paying yourself should be a planned part of your business expenses. This is why budgeting is so important.
Final Thoughts On Paying Yourself As A Small Business Owner
As a business owner, you do every job under the sun–especially at the beginning. You deserve to get paid for your hard work. Draw up your business budget, research your tax requirements, and plan for your income in your tax expenses, and you will be paying yourself in no time–even if it feels like a far-off dream right now.
If you’re feeling lost with accounting, don’t stress. That’s why we’re here. We can help with bookkeeping and accounting management, so you get the money you deserve. To get started, contact us here!