Paying yourself as a business owner is critical to starting and growing a business. It also signals to investors that the business is legitimate. Properly categorized expenses can simplify tax season by providing organized records of deductible expenses.
Establishing a method for paying yourself can take time and effort. Different methods carry varying legal guidelines and tax implications.
Prioritizing Startup Expenses
Starting a business is expensive, and new entrepreneurs must prioritize expenses. Without proper budgeting and planning, startups can quickly burn through their savings and be left with nothing but debt. Whether it’s paying for office space, equipment, marketing, or other necessary startup costs, startup owners need to consider how much they can afford to pay themselves carefully, as well as how this relates to their overall financial health and the health of their company.
If a startup owner decides to take a salary, for instance, they must ensure that it will be enough to pay for their monthly living expenses and allow them to save for the future. How to pay yourself as a business owner may entail cutting back on other expenses like food, rent, or utilities. Creating a budget that considers fixed and variable expenditures into account can assist startup business owners in understanding their monthly and annual costs.
In addition, startups must make room for loan payments while still being able to keep essential services running and growing their business. It can be done by establishing a budget, cutting unnecessary costs, bartering goods or services with other businesses, and finding creative funding solutions. By prioritizing expenses, startups can avoid financial surprises while being able to meet their loan obligations on time.
Payroll is a vital function in any business. It is not only a legal obligation but also promises employees and their families that they’ll be paid on time. In times of disruption, payroll issues can strain morale and jeopardize a company’s success.
Many entrepreneurs decide to use a salary system for themselves. However, it is essential to remember that a small business owner must still run payroll so taxes are withheld, regardless of the method used. It can be complicated, particularly for newer small businesses with little payroll experience.
The amount an entrepreneur takes as their take-home pay (an owner draw, salary, or dividend) should be based on the average wage for their industry and personal financial needs, such as living expenses and retirement savings goals. It is also suitable for entrepreneurs to keep a rainy day fund aside to help them avoid business fluctuations, such as slow periods or unexpected expenses.
When it comes to work-life balance, an employee’s ability to effectively prioritize at work says a lot about them. Employees must be able to prioritize activities based on importance, urgency, and level of commitment to manage various projects effectively. It also shows employers they can stay on top of their workload and clearly understand each task.
Prioritizing Other Expenses
As a business owner, there are many expenses that you must consider. Some are necessary to the success of your business, while others may be less important and can, therefore, be put on hold or reduced. It’s essential to prioritize your business expenses to allocate enough money toward revenue-generating items, loan payments, and other essential expenses.
It is also essential to separate your personal and business finances as much as possible. Commingling funds can create many problems for your business, making it difficult to do your bookkeeping and creating tax complications. That is especially true for businesses that offer asset protection, like corporations and LLCs.
If you need help prioritizing your business expenses, look for input from your managers. They can provide valuable information on essential and non-essential costs that can be scaled back or eliminated without affecting performance or customer satisfaction.
Finally, it’s essential to review your business expenses regularly. This way, you can ensure that you’re using the correct percentage of profits to pay yourself and aren’t putting your business at risk of cash flow issues. It would be best to compare your profit percentage with your team members’ wages to ensure you pay a competitive rate. It is vital for staff retention and attracting the best talent.
Many business owners start their ventures for two reasons: to make money and to fulfill a dream or passion. While the latter may be a more rewarding reason, your company must make enough money to cover its operating expenses and pay you for your work.
The exact method of how you pay yourself depends on your legal structure and your company’s overall profitability. For example, officers of C corporations are typically paid salaries based on their performance and other factors. In contrast, shareholders of S corporations can take regular distributions (or draws) that do not have traditional payroll taxes taken out.
Regardless of the method you choose, it is vital to prioritize your savings goals. Having a good amount of cash saved in the bank can help protect your finances and ensure you can keep your company afloat during any economic downturns or unforeseen expenses.
Keep track of your savings and other business income using a financial program such as Freshbooks, which provides user-friendly invoicing and accounting software. It will allow you to quickly categorize and track your income and expenses and prepare for tax season. Ultimately, separating your personal and business expenses is essential, as this can help you avoid underpaying yourself or working for free.