Introduction
As a business owner, you’re responsible for managing everything from marketing to finances. That means that constantly evaluating how to pay yourself in a sustainable and fair way is essential. Unfortunately, many new entrepreneurs simply neglect this crucial part of running a successful business. In this article, we’ll be diving into practical strategies and tips for paying yourself as a business owner without hurting your finances.
5 Effective Strategies to Pay Yourself as a Small Business Owner
Here are five practical methods entrepreneurs can use to pay themselves:
- Draw a salary
- Taking dividends
- Paying yourself a distribution
- Owner’s draw
- Increasing personal expenses
One popular method of payment for small business owners is through a salary. You may decide to set this up as if you were an employee and take a regular payment. Another option is paying yourself through dividends if your company is structured as an S corporation, partnership, or limited liability company. In this case, any profits from the business will be taxed at the individual tax rate rather than the corporate rate.
Another option could be paying yourself a distribution. This strategy is most applicable to business owners who have a pass-through tax structure like an S corporation or LLC. It will depend on the type of company at hand and whether it is possible to distribute profits in this way. Alternatively, an owner’s draw could be taken as a withdrawal from profits generated over time. Finally, business owners can consider increasing personal expenses by using business money for personal expenses. This strategy could appear suitable for self-employed individuals who might incur more expenses than usual, not charging them to the business at first, and then reimbursing themselves from future profits later against the hard work invested.
Paying Yourself as a Business Owner: Tips and Tricks for Success
Here are some tips and tricks you should keep in mind when considering self-payment:
- Create a budget for personal expenses
- Estimate your income tax and plan accordingly
- Re-invest profits in your business
- Consider taking a monthly salary and avoid payrolling
- Monitor your business expenses consistently
When running a business, personal expenses and business operations can easily mix-up. But creating a budget for personal expenses is a crucial step in determining affordability. By estimating your income tax early, you can stay afloat with how much you’re taking home and plan for other expenses down the line. Rather than splashing an earned profit immediately, wise owners reinvest back into their operations to help them grow healthily. Payrolling could be detrimental, especially when you have nothing much to spend on salaries yet. Instead of putting yourself on payroll, taking a monthly salary can avoid some of the tax consequences related to payroll taxes. Monitor your business finances often so you can have a clear financial roadmap and spot any discrepancies immediately.
The Ultimate Guide to Paying Yourself: Advice for Business Owners
When considering how to pay yourself, here are key factors to keep in mind:
- Your business structure
- Your target salary
- Your cost of living and savings goals
- Your business’s financial health
Business owners must consider their company structure’s tax implications when determining how to pay themselves. It’s essential to aim for an appropriate salary that satisfies your lifestyle needs, personal savings goals, and take into account your competitors’ benchmark. The cost of living around your area helps in determining reasonable allowances for your income. Furthermore, your company’s financial health can sometimes affect how much you can pay yourself. Don’t be highly dependent on your business’s earnings to fuel your lifestyle.
Smart Ways to Pay Yourself as a Business Owner and Still Grow Your Business
If your profit margins are narrow, it can feel like you can either pay yourself or grow your business, but not both. Here are some strategies that can help:
- Pay yourself a lower amount and reinvest profits in your business
- Take a smaller salary early on and grow it over time
- Consider hiring freelancers for short-term projects
- Automate business processes to save money
- Be strategic with your expenses to maximize profits
An excellent way to bridge the gap between paying yourself and growing your business is by taking a smaller salary and reinvesting money back into your company. Alternatively, consider a delayed salary and equity option in the future for better ROI. Instead of hiring employees on full-time payrolls, bring on freelancers on project-based work to save money. To save on costs elsewhere, automation should be welcome to boost productivity and reduce the need for unnecessary expenses. Lastly, ensure you’re strategic with every other expense that your company pays for.
Finding Financial Balance: Paying Yourself as a Business Owner
Here are some challenges business owners might face when trying to find financial balance as a business owner:
- Feeling guilty about paying themselves
- Not making enough profit to pay themselves adequately
- Spending too much on personal expenses
- Overspending on business expenses
- Not having a good handle on their finances
Recognizing the challenges business owners might face when trying to find financial balance is a crucial first step in finding a way to overcome them. Many entrepreneurs are passionate about their work and may feel guilty about paying themselves—others might struggle with low profits that make it challenging to pay themselves a fair amount. On the other hand, overspending on personal or business expenses may eat up most of the company’s revenue. Another common challenge business owners face is not having a good picture of their company’s financial health and spending, which may lead to poor decision-making in the future. Only with proper structuring and guidance can these challenges be effectively addressed.
Self-Payment for Entrepreneurs: Creative Approaches to Sustain Your Business and Enjoy Your Passion
Here are some creative approaches entrepreneurs can use to pay themselves while still focusing on their business:
- Investing in passive income streams
- Creating content as an affiliate marketer, podcaster, or blogger
- Diversifying income by offering consultancies or freelancing
- Building multiple businesses alongside each other
- Creatively saving and investing to hedge against low business returns
Thinking outside the box and exploring multiple income streams is one of the creative ways entrepreneurs can approach self-payment while still keeping their business running. Passive income streams like renting out properties can give an entrepreneur an option to invest in other income streams. A business blog, affiliate marketer, or podcaster can use content to earn some extra cash through commercial collaborations and Google Adsense. An available surplus can also allow an entrepreneur to offer different consultancies or freelancing without disrupting core business operations. Often, entrepreneurs may also have multiple businesses running parallelly that supplement each other to pay themselves in the other business’ quiet moments. Finally, saving and investing in other ventures can also help hedge against low returns from your primary business.
Conclusion
The importance of paying yourself as a business owner cannot be overstated. As we have seen, there are different strategies and tips available to help you achieve a fair pay without hurting your business’s financial health. The key is to find a balance that supports your lifestyle while ensuring your company has the necessary resources to grow. With a better understanding of how to pay yourself as a business owner, you can make more informed decisions and enjoy the fruits of your labor.
