The entrepreneur’s pay should come from the business’s net profit or revenue minus all operational expenses. It can fluctuate significantly depending on the time of year or the company’s success.
It’s essential to keep your personal and business finances separate. It will help you avoid any potential financial mistakes.
Set Up a Budget
As a business owner, you must ensure that your income is sufficient to cover expenses and allow you to live comfortably. The first step is to create a company budget that includes your salary and business expenses. It’s also a good idea to consult with an accountant and other experts who can help you set up a budget that is best for your business’s structure and stage of growth.
Once you have your budget, you can determine how to pay yourself as a business owner. There are several ways to pay yourself, including a draw, a salary, and shareholder distributions or dividends. The most important thing is to find a method that works for you and is consistent.
For example, some business owners pay themselves a percentage of their net income and save the rest in savings. This way, they can stay on track with their goals and keep their personal and business funds separate. It’s also a good idea for small business owners to establish a contingency fund in case of unexpected expenses.
Create a Savings Account
When it comes to paying yourself as a business owner, you need to carefully balance what the IRS expects in compensation with what your personal budget needs. You should also consider any other forms of payment you receive from your business, such as dividends or shareholder distributions.
The best way to pay yourself is by establishing a profit-based system. As a small business owner, you should work with an accountant to determine the most optimal way to do this. Generally, it would be best to base your salary on net income after setting aside 30% for taxes.
Any extra income you have left over should go into a business savings account to help build a cushion against unexpected expenses. That is why choosing a high-yield business savings account with checking account privileges is crucial so you can easily access that money when needed. Review the account’s terms to learn about costs, including overdraft and wire transfer charges, minimal deposit requirements, and how long the account will be inactive before incurring an inactivity fee.
Get a Credit Card
A business credit card allows entrepreneurs to separate personal and business expenses while earning rewards. Getting a card can also provide a financial cushion when accounts receivable are behind or sales are low.
However, the convenience and ease of using a credit card can come at a cost, as businesses often pay more interest than they do on small business loans or lines of credit. It can quickly add up, especially if a company needs a system to monitor spending and carefully avoid exceeding its credit limit.
As a business owner, weighing the advantages and disadvantages of various self-employment options is critical. Whether you use a draw from your business account or a salary, keep clear records of all payments to report them at tax time accurately. Invoicing and accounting software can help you easily track income and expenses, generate reports, and estimate taxes.
Set Up a Line of Credit
There must be more than one-size-fits-all answer regarding how business owners pay themselves. It depends on your entity type, business structure, and company stage. Choosing the right payment style will ultimately set you up for success as your business grows and matures.
Regardless of your approach, remember to account for taxes. It’s also good to consult an accountant to help with your financial decisions.
A business line of credit is a popular way for small businesses to increase their available cash flow. It can fund payroll, marketing, and estimated tax payments.
When applying for a business line of credit, lenders consider the business’ revenue, debt-to-asset ratio, and credit history. They may require a personal guarantee or collateral, such as business equipment, to secure the loan. Once approved, the lender will assign a credit limit based on available cash and the credit score. Regularly using the line of credit and making timely payments will build a solid business credit history.
Create a Savings Account
You must open a savings account as a business owner to put money aside for unforeseen costs. A cash reserve can help you avoid the stress and costs of a financial emergency, such as paying for an expensive repair or renovating your office space. It can also protect you from the uncertainty and costs of an economic downturn or a natural disaster. A healthy balance in a savings account may also help you get approved for a small business loan. Lenders typically want to see that your business has the finances to repay borrowed funds.
A business savings account can also be used to make tax payments, which are due quarterly or annually. It eliminates the need to budget tax payments into your regular checking account and ensures you have enough cash on hand when the time comes to pay your taxes. In addition, a dedicated savings account can allow you to earn interest on your extra business funds. Some banks offer savings accounts with a high annual percentage yield (APY), while others provide a more stable and predictable return on your money.
