How to Pay Yourself as a Small Business Owner

Running a small business can be tricky. While you love what you do, it doesn’t mean you work for free. It is important to pay yourself as a small business owner.

Unfortunately, figuring out how to pay yourself as a small business owner isn’t easy. You need to figure out how much you’re worth, how much money you need to make to pay yourself, and how to set up a self-pay system.

This blog post discusses everything you need to know about paying yourself as a small business owner, from determining how much to pay yourself to setting up a self-pay system. Read on to learn more.

Determine How Much You Are Worth

The first step in paying yourself as a small business owner is determine your worth. This can be tricky, as it depends on various factors, including the size of your company and its profits.

You should consider what a comparable salary would be for someone in your position at another company in your industry. Consider all of these factors before deciding how much to pay yourself.

Calculate How Much Money You Need to Make to Pay Yourself

Once you know how much you are worth, the next step is to calculate how much you need to make to pay yourself. It will depend on your company’s profits, expenses, and any taxes or fees you must take out.

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It is also crucial to consider your personal expenses when calculating how much money you need to make to pay yourself. This will help ensure that you can pay yourself a reasonable salary without running out of money or putting your company at risk.

Understand Tax and Compliance Implications

Paying yourself as a small business owner comes with tax and compliance implications. When paying yourself, you must make sure you comply with all state and federal laws and regulations.

You also need to understand the tax implications of paying yourself. Make sure to work with a trusted accountant or tax lawyer to ensure you meet all requirements and minimize your taxes as much as possible.

One of the most important things you need to remember is that whatever you decide to pay yourself may affect your tax liability. 

Make sure you calculate your taxes carefully and factor them into the amount you need to make when paying yourself.

Understand How Owner’s Equity Factors into Your Decision

Owner’s equity refers to the money you put into the business to get it started, including personal savings or investments. When you are paying yourself, you need to take this into account.

You should also consider how much of your profit goes back into the business. This is important because these funds can be reinvested to help grow your business and ensure its future success.

Keep in mind that if you choose to take an owner’s draw from your business to pay yourself, it cannot exceed the amount of equity you have invested in the company.

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Determine How to Pay Yourself – Owner’s Draw vs Salary

Once you have considered all the factors above, you need to decide how you will pay yourself as a small business owner. The two main options are an owner’s draw or salary.

An owner’s draw is when you take money from your company profits and put it in your bank account. This can be done at any time but is usually done regularly, such as monthly or quarterly.

The good thing is that you don’t have to pay taxes upfront every time you draw money from your company. However, you will have to pay taxes on the profits you take out when you file your taxes at the end of the year.

A salary is a traditional way of paying yourself as a small business owner. You can set up an ongoing salary and have it withdrawn from your company’s bank account each month or quarter.

A salary means that you will receive regular wages for the work you do for your business and may also receive additional benefits such as insurance, paid vacation, and so on.

The downside is that you will have to pay taxes on the salary every quarter or month, depending on your tax filing schedule. Additionally, setting up a salary can be tricky and requires more paperwork.

Set Up a Self-Pay System

Once you have decided how to pay yourself as a small business owner – whether it be an owner’s draw or salary – the next step is to set up a system for self-pay.

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This could involve setting up a checking account with direct deposits from your business or creating an online payment system such as PayPal or Stripe.

No matter the system you choose, keep accurate records of all payments and track expenses. This will help you stay organized and ensure that you are paying yourself the right amount each month or quarter.

Final Thoughts

Paying yourself as a small business owner is important to running a successful business. 

To do it properly, you need to understand your worth, calculate how much money you need to make to pay yourself, and consider the tax and compliance implications. Furthermore, determine how to pay yourself – owner’s draw or salary – and set up a self-pay system.

By following these steps, you can ensure that you are compensated fairly for the work you do in running your business. 

Good luck!

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