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How to Pay Yourself from Your Business: A Simple Guide for Entrepreneurs

by Olufisayo
How to Pay Yourself from Your Business

When you own a business, there’s a lot to keep track of.

Monitoring revenue, controlling profit margins and making sales can be a hassle. When you’re the one calling the shots, it’s hard to know what to do with extra funds.

With most of the revenue going back into the business, how do you pay yourself? Let’s go over some guidelines for how to pay yourself from your business.

How to Pay Yourself from Your Business

What Should You Do with Profit?

When you are running a business, it is important to know that revenue (cash flow) is the money that is being brought into your company through sales.

       

Revenue is not profit. Profit is revenue minus expenses.

The challenge here is that if you have enough money left over to pay yourself, there are always more ways you could be investing that money into the company.

Finding a balance between your own income and valuable business expenses can be tough, so let’s find out how to do it.

How To Pay Yourself From Your Business

According to the IRS, businesses categorized as LLC, sole proprieties or partnerships are considered self-employed.

If your business is registered under one of those models, it is important to know the tax laws for self-employment and what qualifies it before figuring out your income.

       

There are a few ways to pay yourself.

Owner’s Draw

An owner’s draw is when an owner takes funds out of the business for personal use. This is the most common method for small business owners to pay themselves.

The downside to this method is paying your own taxes at the end of the fiscal year or quarter, so make sure you understand taxation for small businesses. However, there is a way around that.

Pay Yourself a Salary

You may decide to pay yourself a fixed salary out of the company’s payroll. This provides the benefit of having taxes and benefits taken out automatically through your paycheck.

You will still have to pay self-employed taxes from the company’s year-end profits. However, your personal earnings will pay throughout the year.

       

If you are interested in this method, invest in a pay stub maker to make the process easier.

How Much Should I Pay Myself?

Your decision about compensation should be based solely on how much money your business needs to continue operating at its best performance.

You are the boss, so what you think is fair is the way to go. Just keep in mind the tax preparation necessary for the owner’s draw method, and be sure to get a business tax ID if you choose to pay yourself a salary.

Next Steps

Unfortunately, there is no uniform percentage of your company’s money on how to pay yourself from your business.

It is up to the owner of the company to stay informed and do what is best to keep the right balance for personal and business needs.

       

Perfecting this process can take a lot of time, so be sure to check out some time management tips for entrepreneurs.

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