If you’re a business owner, chances are you’ve run into the one the most common challenges facing entrepreneurs — paying yourself. It’s not uncommon for business owners to forego paying themselves, often because they feel that they should put everything back into their business.
However, there are some real benefits to paying yourself first. While there is no exact formula for how to pay yourself as a business owner, it’s always a smart decision to first consult professionals to help you better understand the tax and legal implications.
Why is paying yourself important?
When you pay yourself, you set yourself up for success by building up your personal savings. This is crucial for your business because depending on how your business is set up, your personal savings may impact your ability to lock down a loan. The willingness to invest in yourself will show investors, finance companies and banks that you’re not only confident but also committed to your business.
Another advantage to paying yourself are certain tax benefits. These can be tricky to maneuver depending on tax rates, how your business is legally set up, etc. so it’s in your best interest to consult your accountant in this area. Finally, seeing cash come into your own account can have a positive impact on your mental state as you’re rewarding yourself for your hard work.
Now that you know some of the benefits, let’s look at some tips to consider when deciding the best way to pay yourself.
There’s no one-size-fits-all approach, but it’s important that you are both realistic while not undervaluing yourself.
- Identify your business type: This may require a conversation with your accountant and will be key in structuring how to pay yourself. Your accountant can better explain what each type means.
- Determine your worth: You want to find the sweet spot between compensating yourself for your duties while setting your business up for long-term success. Look at your Profit & Loss statements from each month then deduct your amount from that net worth, not the total revenue. This will allow you to pay yourself after major expenses like rent, supplies, and paying your team is taken care of.
- Choose a method: Payment method depends a lot on your entity type, but two common examples are a draw and a salary. Owner’s draws aren’t paid through regular wages and aren’t taxed at the time they’re taken out. A salary is what you’re probably used to — a set, recurring payment that is taxed by local and federal governments.
- Be consistent: Businesses will naturally go through changes in revenue and expenses, but it’s important that you maintain a regular payment to yourself. Although changes can be made (like paying yourself more), you should hold off until consulting a financial expert.
Paying yourself can be an exhilarating experience. You’re finally seeing all the hard work you put in come to fruition. While it’s undoubtedly deserved, be sure to keep a few things in mind when beginning to pay yourself:
- Planning for the future, such as an expansion or location change.
- Tax season can bring many hidden fees. Don’t let taxes surprise you this year.
- Keeping an emergency fund. Business can be unpredictable.
Determining how to start paying yourself as a business owner can be a challenging and confusing time, but with the right planning and practice, it can be accomplished. Interstate Capital can offer flexible financing solutions to cash flow problems allowing you to spend more time focusing on your business’ growth rather than stressing about money.
Learn more about our factoring solutions, and how we’ve successfully funded over 10,000 growing companies since 1993. With invoice factoring we’ll save you time and money by guaranteeing your cash flow and increasing your profitability. Get your FREE factoring rate quote here!