As a business owner, getting your very first paycheck after starting the business is an overwhelming experience. You may be recalling the days when you were being paid by your boss while doing a job. You felt secure. because you knew when and how much your pay would be.
But now you are the boss! You can set the salary and rewards for others. But how do you pay yourself? If you think that you can simply draw money out of business account whenever you need it, you should think again. It is true that all the money in your business account is yours. After all, you are the owner of the business.
However treating your business account like an ATM can lead to poor financial management. Even worse, you won’t have sufficient money in the account to pay off essential bills due to your frequent withdrawals. Consequently, your accountant may have to burn his midnight oil in order to keep the finances and transactions in order.
So you need to be careful while paying yourself as a business owner to avoid such troubles and chaos. Here’s how.
Know your business and its needs.
First of all, determine your business type and its requirements. It will help you to understand the scale of your business and your own personal cash flow needs as well. The clearer you are about your requirements, the easier you will be able to create a suitable period and amount to pay yourself. Make your accountant or business lawyer a part of the process.
Determine the best payment method for you.
Once you’re done with the first step, consider the suitable payment option for you. Generally speaking, draw and salary are the two widely used payment methods. However, you should learn the ins and outs of both methods to end up with the right one.
Draw is the most popular withdrawal method among business owners. It is also known as “owner’s draw” as it is the amount drawn by the owner for his personal use. It is suitable for sole props, business partners and LLCs who don’t take a salary. Generally, owner’s draws are tax free at the time they’re taken out.
A salary is another option you can choose to pay yourself. By doing so, you will be treated in the same way as your employees from tax and budget perspective. If you are a corporation where the business is legally separate from the owners, a tax legislation system will expect you to receive payment through salary, not an owner’s draw.
If you are opting for this payment method, make sure to keep taxes and other deductions in mind while structuring your salary. In this scenario, the Paystub tool is really a great help as it creates the salary stub instantly according to the latest taxes, overtime and other deduction. All you need to do is fill in your details.
So how much should you pay yourself?
There is no exact “percentage number” to set your share out of the revenue. Instead, it depends on the number of factors like profit, responsibilities, partner’s share, business costs, taxes and future expansion plans.
Taking note of the average income of your industry or peers is also helpful. Apart from this you can approach an accountant to review your figures which will help you determine the salary after factoring in all variables.
Set your payroll schedule.
When should you pay yourself and how often? It is as important as deciding your payment. The payroll schedule varies based on the factors like number of employees and due date of the bills. For example, if you want to pay yourself twice a month, make sure you afford to pay the rent from your first paycheck. You can cover the rest of your bills from your second paycheck. In this way, you will not face a lack of funds in the first half of the month.
Remember to also take into account the number of employees while planning your payroll schedule to keep a healthy cash flow. In this way, you can pay yourself the right amount at the right time through the right way. It
will not only enhance your business’s financial health, but also take care of your personal finances.