If you’re running a business, knowing how to pay yourself as a business owner is essential. This can be a tricky process, as there are several factors to consider, such as tax implications and the best interests of your business.<\/p>\n\n\n\n
This article will discuss the different ways small business owners can pay themselves and help you decide which method is suitable for you. We will also take a quick look at each payment method’s tax implications and give you tips on avoiding mistakes while doing so.<\/p>\n\n\n\n
One of the first things you need to decide when figuring out how to get paid for your work as a business owner is whether you want to take a salary or an owner’s draw.<\/p>\n\n\n\n
A salary is a regular paycheck taxed like any other employee’s income.<\/p>\n\n\n\n
For the self-employed, salary can mean different things. While some may take home whatever is left after they pay taxes and handle all the business expenses, others may set aside a specific monthly amount that goes towards their personal expenses.<\/p>\n\n\n\n
Paying yourself a salary when self-employed should not pose a problem, provided that you maintain accurate financial records. One method of calculating compensation is to calculate your net income first, which is your total revenue minus any business expenses. The other is relying on the average market salary for your position<\/a> so you can get an idea about the appropriate amount.<\/p>\n\n\n\n Whichever method you choose, it is crucial to maintain accurate financial records and ensure that you have separate personal and business accounts.<\/p>\n\n\n\n An owner’s draw is money you take out of your company’s profits and is not subject to payroll taxes. The owner’s draw is the amount of money you, as your business owner, pay yourself from your business each year for basic expenses.<\/p>\n\n\n\n The IRS doesn’t require business owners to pay themselves a salary, but if they don’t, they may have to pay self-employment taxes on their net earnings from the company. This is why even self-employed people often allocate a salary for themselves.<\/p>\n\n\n\n The amount of the owner’s draw should be based on the needs of the business and the owner equally. It’s important to remember that taking too much out of your business can jeopardize its financial health.<\/p>\n\n\n\n You need to think about a few things when deciding which payment method suits you best.<\/p>\n\n\n\n As an owner, one of the first decisions you’ll need to make is what type of legal business entity your business will be. This decision will have significant implications for how much you’ll pay yourself and affect factors such as liability protection and tax treatment.<\/p>\n\n\n\n So, how do business owners get paid? In general, sole proprietorship and partnership offer the most flexibility when setting your salary, while corporations have more restrictions. <\/p>\n\n\n\n If you’re operating as a sole proprietorship<\/a>, you can rely on the owner’s draw from the owner’s equity balance and business profits. The partnership also doesn’t allow a salary, as you are both a partner and an employee.<\/p>\n\n\n\n Both C-corp and S-corp allow you to set a salary for yourself<\/a>. If you’ve set up a C-corporation, you can rely on salary and distributions. In the case of an S-corporation, you can pay yourself a market-rate wage as an employee and take dividend income as a shareholder.<\/p>\n\n\n\nRelying On an Owner’s Draw<\/h3>\n\n\n\n
The Best Way To Pay Yourself as a Business Owner – Factors To Consider<\/h2>\n\n\n\n
Type of Business Structure<\/h3>\n\n\n\n
Sole Proprietorship or Partnership<\/h4>\n\n\n\n
C-corp and S-corp<\/h4>\n\n\n\n
Limited Liability Company (LLC)<\/h4>\n\n\n\n