Paying Yourself as a Business Owner
Of all the considerations revolving around starting your own business, paying yourself is simultaneously the central issue as well as one that can be overlooked or casually addressed.
This happens for two good albeit competing reasons. The first is simple, you went into business to make money. The second is also simple, the beginnings of a new business are volatile, and you may not be able to afford to cut yourself a check. Allow me to talk you through the basic issues.
Please note as always, this is a simple overview. I would love to talk to you regarding these issues at length if that would be helpful.
What is an Owner’s Salary?
The basic two options are taking an owner’s draw or a salary. The draw is available for sole proprietors while the salary is for ‘S’ corps and ‘C’ corps.
A salary as the owner is the same as the salary as an employee. Consistent in time and amount, the salary is a budget line and is recorded on your yearly profit and loss statement. Taxes come out with every check and make your personal taxes easy at the end of the year.
The downside is most new businesses have cashflow issues and paying yourself a salary is not very flexible.
What is an Owner’s Draw?
The other option to paying yourself is an owner’s draw. The owner’s draw is variable in amount and timing. You can take more when times are good, and more importantly, take less or none if you have other financial obligations. Taxes are not taken out of the draw, so you need to save money to pay your quarterly tax bill. An owner’s draw is listed on the balance sheet for the company.
The downside of the draw as I alluded to earlier is that you have to be mindful of your personal tax accounting as the year progresses.
Partnerships
Partnerships create another set of issues that are outside of today’s discussion. Also, be sure not to mix personal and business funds! The stronger the wall between the two sets of funds the better.
So that is a quick primer on how a self-employed person should think about paying themselves.
I have decades of experience helping small to mid-sized businesses navigate these issues and would be honored to help you as well.
Feel free to reach out for more information.
