As a business owner, you don’t want to take too much and drain your business. However, you also don’t want to take less than what you need and deserve.
Now that you know the different ways to pay yourself—draw vs. salary—the next step is to figure out how much you should take home. Factors to consider:
Business structure: Your business entity impacts a lot of your decisions. Many entities don’t allow you to take a salary, meaning you’ll need to take an owner’s draw.
Business performance: Regardless of which way you choose to pay yourself, it’s important to remember that your compensation as the business owner isn’t set in stone. You can make some changes as you consider your business’ performance. You should only pay yourself from your profits and not overall revenue. So, if your business is doing well, you might be able to increase your compensation.
Business growth: While performance is an important consideration, so is the current stage of your business. For example, if your business is a relatively new startup and in a stage of high growth, you’ll likely want to reinvest a lot of the profits back into the business, rather than pocketing them as compensation for yourself.
Personal expenses: Reasonable compensation will give you a starting point, but it doesn’t need to be your only answer. You have personal expenses—from your mortgage or rent to your savings account—that you need to fund. Get a good grasp on what those expenses are, so you can make sure you’re taking home enough to cover them.
Those considerations will help you land on a suitable number to pay yourself, whether you take it as a salary or a draw.
Here are a few other things to consider:
Business funding: You need to leave enough capital in the business to operate, so consider that before you take a draw.
Tax liability: A business owner needs to be very clear about the tax liability incurred, whether the distribution is a salary or a draw. Work with an accountant to plan for your tax liability and any required estimated payments. Contact us for assistance.
Each method generates a tax bill: This decision regarding a salary or a draw impacts your business and your personal tax liability. Contact us for assistance.
Be consistent with how you pay yourself, whether you choose owner’s draw or salary. This makes it easier to budget as an individual and as a business.
When cash flow is tight, pay your employees and your suppliers before anything else.
Putting yourself first, regardless of financial circumstances, can lower morale and divert crucial funds away from your operations.
Don’t withdraw your entire profit amount. Keep some money in the company to allow for investments and growth—you can always raise your salary/draw amount down the line when business is more profitable.
Paying yourself can be tricky business, but it does get easier and more intuitive with time. Just keep in mind that your business is not an unlimited source of money, so don’t dip into your accounts without carefully considering the implications.
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