Paying Yourself through Your Business
One of the questions that business owners have is how they can pay themselves through their business. There are different factors that influence how you can pay yourself as a business owner such as the stage of growth of the business, the business structure, and the like. Although you might not want to pay yourself when you start building a business, it is always a good idea to know about the process.
How Can You Pay Yourself Through Your Business?
When it comes to paying yourself, business owners have two options as mentioned below.
One of the ways you can pay yourself is by paying yourself a regular salary similar to how you would pay a regular employee. It would require you to withhold taxes from the paycheck. It is a legal requirement if your business is structured as a C-corporation or S-corporation or even a limited liability company that is taxed as a corporation. However, it is important to keep in mind that the IRS has placed a reasonable compensation requirement. It means that your salary must be the same as someone else who would do the same job in the industry.
- Taxes gets deducted upfront.
- Stable, recurring expense that can be accounted for.
- Lack of flexibility.
- You must follow the reasonable compensation rule no matter how profitable your business might be.
2. Owner’s Draw
It is an amount that you draw out in cash or in-kind from the profits generated by the business on a need-basis. But, you can only make drawings up to the amount that you have invested in the business or the owner’s equity as it is known. Although you are not required to pay tax upfront when you take a draw, you will need to budget all the drawings you make.
- Greater flexibility.
- You get to draw based on the performance of the business.
- Need for budgeting to account for the drawings.
In addition to the above, there are also other methods that are available. These include distributions and dividends. However, these methods depend on the structure of the business.
How to Decide Which Method to Use to Pay Yourself?
The following factors influence how you pay yourself.
- Business Structure: The specific business structure dictates whether you can make an owner’s draw or take a salary. Only if you are operating the business as a sole proprietor, partner, or LLC can you receive a salary.
- Business Stage: When entrepreneurs start a new venture, they do not take any money out of the business. On when the business has a firm footing or a steady cash flow is it advised to take out money.
- Personal Finances: The method and payment amount you use can be used for covering personal obligations such as a car loan, mortgage, and basic expenses.
How Much Can You Pay Yourself?
Now that you know more about how to pay yourself through your business, you must be wondering how much money you can get from the business. This is where we can help you out. Let our professional accountants walk you through the requirements of your business structure.