One of the most common questions I get from readers is how to pay themselves as a business owner. It’s a great question and one that deserves a detailed answer. After all, paying yourself is one of the most important aspects of being a business owner. Get it wrong, and you could find yourself in financial trouble. Get it right, and you’ll be on your way to a prosperous future.
There are two main ways to take money out of your business – through a salary or an owner’s draw.
• Salary – If you are in business, it is important to pay yourself as an employee of your company. This ensures that taxes will be withheld from every paycheck just like if they were working for someone else and the IRS has a “reasonable compensation requirement” which means this practice should follow what others doing similar jobs get paid around them.
• Owner’s draw – You have the option of drawing money from your business’s profits on an as-needed basis. This can be done up to what you put into the company, which is called owner’s equity. It might make more sense for this portion of income or resources to be set aside regularly so they’re available when needed without having too much uncertainty surrounding them due to tax bills.
When deciding how much to pay yourself, it’s important to consider average salaries for entrepreneurs. Ultimately, the goal is to make sure all operational expenses are taken care of before you take any money for yourself.
So, how do you pay yourself as a business owner? The answer to that question depends on your business’s structure, stage of growth, and personal finances.
Paying yourself as a business owner is an important part of financial planning—but there’s no one-size-fits-all answer. The best way to approach it is by taking into consideration your business structure, stage of growth, and personal finances. With that information in hand, you can decide whether a salary or an owner’s draw makes more sense for you—and set up a payment plan that works for both you and your business.
If you’re looking for more information about paying yourself as a business owner or want help setting up a system that works for you, BOOK A FREE CLARITY CALL with me today!