There are several ways to pay yourself for your business. Your choice will depend on your tax status, corporate structure, and the IRS’s reasonable compensation requirements.
You can take a salary or an owner’s draw, a combination of both, or even a distribution of profits. Whichever method you choose, you’ll want to follow these three steps to do it correctly:
Determine Your Salary or Draw
Paying yourself is one of the most important business-related tasks, but how you do so depends on your company’s structure, stage and other factors. Choosing the right method will help you save on taxes, optimize cash flow and maintain tax compliance. But how to pay yourself as a business owner? The most basic way to compensate yourself as a business owner is through an owner’s draw or salary. An appeal is a discretionary amount of money you regularly take from your business account. At the same time, a paycheck is a set amount paid to you on a fixed schedule, similar to how you would pay an employee.
To decide which option is best, determine your budgetary needs and compare them to your business expenses. This will help you calculate how much you can reasonably withdraw from your business each year without chipping away at your equity or negatively impacting your bottom line. Next, consider your business’s current financial status and what kind of growth you anticipate. These factors will help you decide whether an owner’s draw or a salary is a better fit.
Set Up a Business Bank Account
Whether you’re an established business or just starting, creating a clear separation between your personal and business funds is crucial for legal purposes. The IRS and your customers will appreciate your professionalism, and you’ll save yourself the headache of keeping track of both types of accounts if something goes wrong.
When you have a separate business account, it’s much easier to keep track of your expenses and income. Additionally, you’ll have more legal protections against personal liabilities if you ever face a lawsuit from a customer or employee. Many business bank account options are available, from traditional brick-and-mortar banks to online startups catering to small businesses. Compare fees, and choose an account that offers integrations with bookkeeping apps and platforms.
Apply for a Business Credit Card
A business credit card is a revolving line of credit with a set limit that you use to pay your company-related expenses. You will receive a statement each month with the amount you owe, and if you don’t pay the entire balance each month, interest will be charged. Various business cards are available, and your choice will depend on your company’s spending habits. For example, if you travel for work, you may want a card that earns miles. Other business card perks include cash back, additional employee cards, and technology benefits like accounting integrations. Getting approved for a business credit card can be challenging if you’re a startup company with little or no revenue. The lender will check your social security number, so your credit score matters. You’ll also need to determine whether the card issuer reports to a business credit-reporting agency. The card will only help you build your business credit if they do. Lastly, make sure to only apply for business cards that you can qualify for.
Create a Payroll Schedule
Whether you’re using payroll software or doing it manually, you’ll need to establish the pay schedule for your business. This is when you decide how often you’ll pay yourself and your employees and the dates for collecting timesheets, running payroll, and paying yourself. There are three common payroll schedules: twice a month, biweekly, and weekly. Each has pros and cons; your choice will depend on state law and your work.
A weekly payroll schedule can simplify employee timekeeping and align payroll liabilities with your business income. It also can improve cash flow by giving workers quicker access to their earned wages.
A biweekly payroll schedule distributes paychecks every two weeks or 24 times a year. It works best if you have salaried employees because it gives them consistency in their wages and can help you balance payroll with your cash flow more easily. But it can be difficult for hourly employees to manage their expenses when paydays fall on certain days, such as national holidays and weekends.
Make the Payment
There are many factors to consider when deciding how much to pay yourself. In addition to balancing your business goals with your personal needs, there are important tax implications. For example, C corporations are subject to double taxation (tax on profits and payroll taxes). Generally, other business structures such as S corps and LLCs can distribute profit throughout the year through dividend payments, which aren’t subject to tax at the time of distribution. Ultimately, using the most tax-efficient method possible while meeting your short- and long-term operating needs is best. To that end, review your business’s profit and loss statements regularly to assess how much net income you pull each month. The IRS also requires that you pay yourself a “reasonable” salary, defined as in line with the norm for your title, duties, and company size. To help keep you on track, this step-by-step guide to paying yourself as a business owner will provide you with an overview of the basics and the key considerations.
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