Paying Yourself: A New Business Owner's Guide

Being your own boss sounds like a dream come true, right?

The ability to set your hours, make your own rules, and, most importantly, pay yourself whatever you want!

Well, hold your horses there, cowboy! You need to take a step back and ask:

"how much should I pay myself as a business owner?"

Because paying ourselves as small business owners is a little more complicated than just raiding the cash register.

In this blog, we'll explore the importance of paying ourselves as small business owners and the key considerations you'll need to take into account when determining just how much of the pie you should slice off for yourself. So buckle up, buttercup, and let's get ready to talk about money, honey!

Types of Business Structures: What's Your Flavor?

So, you've decided to start a business - congratulations, you're a business owner! But before you start counting your cash, you must decide what business structure you'll operate under. Here are the most common types:

Sole Proprietorships: "I Am the Captain Now"

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Advantages and disadvantages:

As a sole proprietor, you're the sole owner of your business, which means you make all the decisions and get to keep all the profits. However, you're also personally responsible for any debts or legal issues your business may incur.

Paying oneself as a sole proprietor:

You can pay yourself by taking a salary, but remember that you'll also need to pay self-employment taxes.

Partnerships: "Two Heads are Better Than One... Usually"

Advantages and disadvantages:

Partnerships allow you to share the workload and pool your resources, which can be a significant advantage. However, you'll also need to split the profits and make decisions together.

Paying oneself as a partner:

You can pay yourself a salary or take distributions, but keep in mind that you'll need to pay self-employment taxes on your net income.

Limited Liability Companies (LLCs): "Liability? Ain't Nobody Got Time for That"

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Advantages and disadvantages:

LLCs offer the same liability protection as corporations but with less paperwork and more flexibility. However, forming an LLC can be more expensive than other business structures.

Paying oneself as an LLC owner:

You can pay yourself a salary or take distributions, but remember that you'll need to pay self-employment taxes on your net income.

Corporations: "Big Business, Baby"

Advantages and disadvantages:

Corporations offer the most liability protection and are the most established business structure. However, they're also the most complicated and expensive to set up and maintain.

Paying oneself as a corporation owner:

You'll need to pay yourself a salary and take distributions, but keep in mind that you'll also need to pay payroll taxes and comply with complex tax laws.

Determining a Reasonable Salary: Show Me the Money!

Now that you've decided on a business structure and created a business bank account, it's time to discuss how much you should pay yourself. Here are some factors to consider:

Industry Norms: "Keep Up with the Joneses"

Explanation:

Research what other business owners (especially small business owners) in your industry and location are paying themselves to get a sense of what's reasonable.

Importance:

can help you set expectations and avoid over or underpaying yourself.

Business Revenue and Profitability: "Money Talks"

Explanation:

You should base your salary on how much money your business income and how much profit you generate.

Importance:

If you're not generating enough revenue or profit, paying yourself too much could hurt your business in the long run.

Personal Financial Needs: "Show Me the Money, Part II"

Explanation:

Consider your personal financial obligations and how much you need to live on.

Importance:

Be honest with yourself about your personal finances. While being fair to your business is important, you must also pay yourself enough to cover your personal expenses.

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Steps to Take to Determine a Reasonable Salary: "Crunching the Numbers"

Researching industry standards and talking to other business owners in your network
Assessing your business's financials and projecting future revenue and profits
Evaluating your personal financial needs and creating a budget that includes your salary

Remember that your salary may need adjustments over time depending on changes in your business's financials and your personal finances. It's essential to regularly review and adjust your compensation to ensure that you're paying yourself a reasonable wage.

Other Forms of Compensation: Benefits Beyond Salary

While salary is undoubtedly a crucial part of compensation, there are other ways you can reward yourself for your hard work as a business owner. Here are some options to consider:

Bonuses: "I'll Take Mine in Cash, Please"

Explanation:

Consider rewarding yourself with a bonus based on your business's performance rather than a set salary.

Importance:

This can incentivize you to work harder and help you save money during slow periods.

Retirement Plans: "It's Never Too Early to Start Saving"

Explanation:

Consider setting up a retirement plan, such as a 401(k), to save for your future.

Importance:

This can help you secure your financial future and attract and retain employees.

Insurance: "Stay Healthy, My Friends"

Explanation:

Consider providing health insurance for yourself, your family, and your employees.

Importance:

This can help you attract and retain employees and protect yourself and your loved ones from unexpected medical expenses.

Other Perks: "Treat Yo' Self"

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🛑 Talk to a tax professional before you "treat yo' self."

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Explanation:

Consider other forms of compensation, such as a company car or phone, paid time off, or professional development opportunities.

Importance:

These perks can help you stay motivated, attract and retain employees, and enhance your professional skills.

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Remember that these forms of compensation may have tax implications, so consult with a financial professional before making any decisions. And remember, while it's important to pay yourself fairly, don't forget to reward yourself for your hard work and celebrate your successes along the way.

Tax Implications: The Only Certainties in Life are Death and Taxes

While paying yourself is vital, it's also necessary to understand the tax implications of your compensation decisions. Here are some things to consider to pay taxes:

Taxation of Business Structures: "Not All Structures are Created Equal"

Explanation:

Different business structures have different tax implications, such as sole proprietors being taxed on their personal income and C corporations being taxed on their profits.

Importance:

Understanding the tax implications of your business structure can help you make informed decisions about how to pay yourself.

Income Taxes: "The More You Make, The More You Owe"

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Explanation:

Your salary will be subject to federal, state, and local income taxes.

Importance:

Be sure to factor in these taxes when determining a reasonable compensation for yourself.

Self-Employment Taxes: "You're Your Own Boss and Your Own Tax Collector"

Explanation:

If you're self-employed, you'll be responsible for paying the corresponding taxes, which cover Social Security and Medicare.

Importance:

Be sure to factor in these taxes when determining what a reasonable compensation looks like for you.

Deductibility of Business Expenses: "Every Penny Counts"

Explanation:

You may be able to deduct certain business expenses, such as office supplies and travel expenses, which can lower your taxable income.

Importance:

Be sure to keep track of your business expenses and consult with a tax professional to ensure you're taking advantage of all available deductions.

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Remember, tax laws can be complex and change frequently, so consult with a tax professional to ensure you stay compliant and minimize your tax liability. By understanding the tax implications of your compensation decisions, you can make informed choices that will benefit both you and your business.

Conclusion

In conclusion, paying yourself as a business owner is critical to running a successful and sustainable enterprise. Make sure you consider factors such as your business structure, reasonable compensation, other forms of compensation, and tax implications when determining your compensation.

And don't forget to regularly review and adjust your compensation based on your business's performance and your personal financial needs. After all, being a business owner isn't always easy, but rewarding yourself for your hard work is always a good place to start.

Happy paying!

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▶️ Introduction

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👀 Types of Business Structures: What's Your Flavor?

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💸 Determining a Reasonable Salary: Show Me the Money!

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✨ Other Forms of Compensation: Benefits Beyond Salary

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💀 Tax Implications: The Only Certainties in Life are Death and Taxes

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