Small business owners need cash to breathe life into their companies. From starting and growing a business to paying it’s hard to keep up with ever-growing list of expenses. And, you need money for yourself. Use these tips to understand how to make sure you can pay yourself what you deserve.
How to pay yourself from your business
When you own a business, paying yourself is different from receiving paychecks as an employee. These are some questions you might have about payments:
- Can I take money out of my business’s income, or do I receive a salary?
- How do taxes work with my paychecks?
- Do I choose how much to pay myself?
In order to answer these questions, you need to look at factors such as your business entity, profits, and how much you think is a fair rate for your work.
The way your business is structured has a huge impact on how you pay yourself. The type of business structure you have influences how you receive your wages, pay taxes, and file taxes.
There are a few different business structures you could choose from when starting your business:
You are the sole owner of your business, meaning you and your business are treated as one in the same. This is the easiest and least expensive business structure to establish. Since you are your business, you can receive all profits, but you are also liable for all losses.
Partnership: You and at least other person own the business. Each partner shares the profits and losses of the company. The amount of profit you receive depends on how much ownership you have in the company, as outlined in the partnership agreement.
Forming a partnership means registering with your state and establishing a business name. Like a sole proprietorship, a partnership is relatively easy and inexpensive.
You are legally separate from your business. That means you are protected from losses, but you are also taxed twice. You are taxed for your individual income and your business.
You are legally separate from your business. As an owner, you are known as a shareholder in the company. Unlike C corporations, S Corps are not taxed twice.
Single-Member LLC (Limited Liability Corporation):
As the only owner of the single-member LLC, you will be treated similarly to a sole proprietor. However, you have limited liability in the business, meaning you have some protection from business losses. A single-member LLC is a combination of a sole proprietorship and corporation.
You are treated similarly to a partner in a partnership unless you elect to be treated as a corporation. You also have limited liability. A multi-member LLC that is treated like a partnership is a combination of a partnership and corporation.
Paying yourself from your business entity
Paying yourself from your business depends on which structure you operate under. You can either receive a draw or salary.
A draw, or owner distribution, is a portion of your business’s profits that you distribute to yourself as payment. When you receive a draw, you are responsible for paying estimated taxes (income and self-employment taxes) because taxes are not withheld from your pay.
A salary is a fixed amount that you receive on a regular basis, much like what employees receive. With a salary, taxes are taken out, so you do not need to pay estimated taxes.
If you are actively working in your business, you will generally receive your income the following way:
- Sole proprietorship
- Single-member LLC
How much revenue is coming into your business, and how many expenses do you have? Looking at your business profits can help you determine your paycheck.
If your business isn’t profitable, you might consider taking a smaller paycheck. You don’t want to pay yourself large wages and then have difficulty paying business bills. For months when business profits are low, opt for lower wages.
Create a small business budget to help plan business revenue and expenses. This could help you gauge how much your paycheck will be. For example, your business only has a profit of $3,000 in one month. You pay yourself $1,000 and keep $2,000 in your business account to cover upcoming expenses.If your business is profiting, you might be able to afford to pay yourself more. According to the SBA, Most small businesses pay themselves 50% of their profits or less.
Also, pay attention to how long your business has been around. If it’s a startup, you might make less profits than if your business has been operating for five years or more.
This is your business. In most cases, small business owners put in the most time at their companies. You might work countless hours more than your employees, so it’s only fair that you would pay yourself more.
To help you figure out how much to pay yourself, you could compare your wages to what other business owners in similar industries make. Though your business’s profits aren’t going to be the same as another business’s, knowing industry averages can help you if you’re unsure.
If you receive a salary or receive distributions from your profits, knowing how much value you add to the business could help you determine your wages. Use the U.S. Bureau of Labor Statistics to find out how much people in similar industries and states earn.
Factor in Your Personal Expenses
Make sure you pay yourself enough to cover personal expenses. You want your business to grow as much as possible, but you also need to make sure you can cover your own bills. Take your recurring expenses, like rent, gas, loan payments, food, etc., into consideration. It’s also a good idea to leave yourself a bit of a safety net in case of unexpected expenses.
Paying yourself is a delicate balance. Knowing how to pay yourself is difficult for any business owner. To recap, follow these tips.
Do consider your business structure before planning on how you’ll pay yourself
Do pay yourself enough to live on
Do budget so your business has enough leftover
Don’t overpay yourself
Don’t forget to mark your wages in your accounting books
Don’t forget to pay taxes on your wages
Still unsure of how to pay yourself? Get a second opinion
Sometimes deciding your business’s budget and figuring out how much to pay yourself is tricky. If you are unsure, it’s better to be safe than sorry. Get a second opinion from a professional, like an accountant.
Bio: Rachel Blakely is a content writer at Patriot Software, LLC, a provider of affordable payroll and accounting software for small businesses. At Patriot, she enjoys providing actionable, growth-oriented information for small business owners.