There are many perks that come with owning a business, but figuring out what and how to pay yourself can be hard. Here is how to take pay when you are the boss.
In a 2018 survey, 62 percent of respondents (American adults) said they desire to start their own businesses. If you’re one of these people, you have every reason to make your desire come true. Starting a business is an opportunity to become your own boss. You make decisions without seeking approval from anyone.
That’s not the best part, though. Being able to pay yourself is the icing of the cake. But how should you pay yourself when you are the boss? Continue reading to learn how to pay yourself as a business owner.
Salary or Draw?
The first step is to determine whether you want to pay yourself a salary or randomly take out (draw) money from the business for personal use. Either option has its pros and cons. Earning a salary enables you to develop a consistent budget for the business. You’ll know how much will go to payroll every month. On the downside, earning a salary could mean putting a strain on the business’ finances, especially when revenues are low.
Drawing money means paying yourself when the business can afford it. If finances are tight, you simply don’t draw any money. However, this option makes it harder to draw and stick to a business budget. If you decide to earn a salary, you might want to use a pay stub generator. This is a software or application that helps you track income.
Consider the Structure of the Business
The legal structure of your business plays an important role when you’re trying to figure out how to pay yourself when you’re the boss. This is because business structures have different tax consequences.
If your business is a C corporation, for example, paying yourself a salary means you’ll face double taxation. The company will pay a tax on its business income and you’ll also pay a tax on your personal income.
On the other hand, sole proprietorships, limited liability companies, partnerships, and S corporations are all known as pass-through entities. Only owners have a legal duty to pay tax on any income derived from these businesses. So if your business is a C corporation, deciding to pay yourself a salary is not a tax-efficient move. You can, however, make it a pass-through entity before starting to pay yourself.
Is the Business Profitable?
It’ every entrepreneur’s dream to run a profitable business. With a healthy profit, it’s easier to grow the business while making yourself richer. If your business is already turning a tidy profit, paying yourself a salary or drawing money makes sense. The business can afford to pay you without running into a cash crunch. On the other hand, if your business is making little or no profit, paying yourself might not be a savvy idea. Your salary will only add to the business’ overheads, increasing the chances that it will get into a cash crunch.
Paying Yourself When You Are the Boss
When you are the boss, you have a lot on your plate. And one of the decisions you have to make is whether to pay yourself. This isn’t an easy decision, but with our guide, you’re in a good position to make the right move.