Whether you take an owner’s draw or distribute dividends to shareholders, the money you pay yourself as a business owner should be tied to your company’s performance. It is essential because how you pay yourself can impact your tax situation.
Learn about your options and how to pay yourself as a business owner.
Set Up a Business Bank Account
A business bank account is required for entrepreneurs who want to separate their personal and professional costs. It also aids in the establishment of business credit and makes it easier to qualify for a loan or work on credit with suppliers.
You’ll need a lot of paperwork to create a business bank account, like the company’s articles of incorporation or corporate bylaws and its employer identification number (EIN). You may also need a government-issued photo ID and a deposit amount. In addition, it’s essential to compare shops for banks and accounts, looking at minimum balance requirements, integrations with accounting software programs you use, and any fees that may be charged.
Some business accounts also provide further benefits, including low-cost cash and change processing, interest-bearing business savings, and payment processing for credit and debit cards. A business bank account can also be created in person or online. You can then move your funds to the new account and close any previous accounts.
Create a Credit Card for Your Company
The ability to track and control your business spending in one location is among the many advantages of acquiring a credit card for your company. You may also improve your company credit score and keep your personal and business spending apart for tax purposes.
How much you pay yourself is one of your most important choices as a business owner. Therefore, balancing your personal and professional duties is crucial to ensure you have money in the bank.
You may be eligible to accept a salary or an owner’s draw, depending on the legal form of your firm. It’s worth talking to a bookkeeper or accountant to understand the result of each option.
Set Up a Personal Budget for Your Business
Balancing your costs with the demands of your business is among the many challenges of running a business. A clear view of your business’s finances allows you to make decisions that maximize profit and growth while giving you confidence that you have enough income to meet your personal budgetary goals.
The first is to create a business budget. It is a forward-thinking document that predicts your expenses and revenues based on current trends and future projections. It includes fixed expenses that don’t fluctuate with revenue, such as rent, insurance, utilities, accounting and legal services, and equipment leases. It also includes your variable expenses, such as marketing and labor costs.
Next, you need to know how you will pay yourself. Considerations include tax liability and how your entity type affects the choice between a salary or owner’s draw. Again, a CPA can help you understand the nuances and ensure you meet your business and tax obligations.
Set Up an Owner’s Draw
The best way to compensate yourself as a business owner will depend on your business structure and tax situation. For instance, if your company is an S or C corporation, you can pay yourself both a salary and an owner’s distribution (dividend income) for tax purposes. An owner’s draw is an alternative to a salary and allows you to take money from your business in flexible amounts throughout the year based on business profits. It is ideal for new LLCs, partnerships, and sole proprietorships.
However, it’s essential to consider all the business expenses you may need to meet, including any upcoming payments or seasonal needs, before deciding whether to take an owner’s draw. It’s also a great idea to talk to a tax expert to be sure you’re including the appropriate taxes in each payment. It’s also critical to ensure you leave enough cash in your business to meet its operating costs and payroll taxes, if applicable. Finally, regardless of your chosen method, keep detailed records in your accounting software so you can file accurate taxes as needed.
Set Up a Payroll System
Whether you take a salary or owner’s draw, you must set up and manage a payroll system. It includes determining deductions, allowances, and other withholdings, calculating gross pay, and tracking work hours. It also includes determining which employee benefits are offered and who pays for them.
It will require you to choose a payroll service or software that supports your business needs and regulations. You must also start a bank account solely for payroll transactions (separate from your business checking account) and purchase workers’ compensation insurance.
Keeping your personal and company accounts separate is critical, especially when managing a small business. It can assist you in keeping correct records and lowering your tax obligation. Additionally, it can increase the professional appearance of your company. Running a payroll can be time-consuming, but it is necessary for a successful business. Using a payroll management tool can reduce stress and save you time each period. The best way to determine which method fits your business is to speak with a certified accountant or tax professional.
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