How Much Should You Pay Yourself?

As a business owner, it may come naturally to you to make sure you pay your employees and put enough money into your business. But paying yourself is just as important.

There are a few ways for a business owner to pay himself or herself while also paying taxes and business debts. Here’s how to figure out how much you make, when, and how you’ll get paid.

Ways to Pay Yourself

Here are two of the most common ways for small business owners to pay themselves:

1.) Salary: If you choose the salary option, you can pay yourself the same way you pay your employees, with taxes taken out.

Use similar jobs in your field to figure out what your salary should be. Keep in mind that the IRS will check to see if your salary is “reasonable” by comparing it to others in your field.

This is how most owners of corporations (S corps and C corps) are set up. They have to pay taxes on both their personal income from the company and the profits that the company makes.

How Much Should You Pay Yourself
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2.) Owner’s draw: When you do an owner’s draw, you take money from your business’s profit as you need it. Even though you won’t have to pay taxes on each draw right away, you will have to pay self-employment taxes when you file your tax return, either quarterly or annually.

This is how most owners of pass-through businesses like sole proprietorships, partnerships, and most limited liability companies get paid (LLCs).

Tips for Setting Your Compensation

Calculate Your Net Income

Before figuring out your own pay, you should figure out your net income to make sure your business can pay its bills. This step is very important if you want to stay out of debt or even avoid bankruptcy.

First, take your gross revenue and subtract the costs of running your business, such as salaries for employees, rent for your office space, etc., to get your net income. After you take out the amount you need to save for taxes, this is your pay.

Consider Tax Savings

To avoid paying too much in taxes, you need to plan (and save) throughout the year. The IRS says that most corporations and self-employed business owners who will have to pay more than $1,000 in taxes each year must file and pay estimated taxes every three months.

Whether you just started a business or you already have one, you should talk to an accountant to find out the tax requirements for your business and to avoid getting fined.

Before taking out expenses, you should always figure out your taxes. As a general rule, you should put away 30% of your income for taxes. If you or your partner are in a higher tax bracket, this percentage could be higher.

Factor in Your Business Debt

After paying taxes, you can use these funds to pay off the debts of your business. If you’ve borrowed money or used a credit card, your lender probably wants you to pay at least a certain amount each month.

How Much Should You Pay Yourself
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Subtract the total minimum payment from your net income each month. If you have money left over after paying yourself, you can make bigger payments each month and pay off your debt faster.

Create a Business Savings Plan

Start saving while you still have money for new employees, training programs, and emergency funds. Figure out which goals are most important to you and which ones you can put on hold.

Your future self will appreciate the time and effort you put into saving money each month for your business goals.

How Much Should You Pay Yourself?

After you take out all of the above amounts, you can start to figure out your own pay. The amount that is left over is your annual salary.

You can divide that number by 12 to get your monthly salary or by 52 to get your weekly salary. To find your hourly pay, divide your weekly salary by the number of hours you work.

Small business owners in the U.S. make an average of about $70,000 a year, but many don’t take a salary for the first two years.

On the other hand, some business owners might pay themselves too much, which would stop their business from growing. You should pay yourself enough to live on, but be realistic about what you need to live and what might be too much.

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