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Problems You May Encounter When Paying Yourself: Manage Your Money Wisely
Your business is your life inspiration, but that doesn’t mean you can afford to work without any financial compensation. In fact, paying yourself as a business owner is not primarily about the money. It’s a powerful energy boost, peace of mind catalyst, and the drive to grow your business faster. Therefore, getting to grips with how to pay yourself as a business owner can be challenging. Develop a smart strategy and use top-notch budgeting planners for taking money out of your company.
In many ways, how to pay yourself as a business owner is determined by the business structure you operate as, along with the phase of your operation development and other parameters. While business owner payment is usually not the highest priority when growing your business, being aware of the specificities and utilizing the right payment solution can boost your operation.
Whether you operate as a sole proprietorship, a partnership, or a corporation, rewarding yourself financially for all the hard work you do is paramount. So, how does a business owner get paid legally and what is the salary of a business owner? Keep reading to find the best answers to this question and protect yourself from bad financial decisions.
3 Common Mistakes While Paying Yourself & How to Avoid ThemBefore we get to the point, it’s vital for you to get the gist of the two main ways to pay yourself as a business owner.
- Small business owners salary: in this case, you pay yourself a typical employee-like salary and withhold taxes from your paycheck. This is a legal requirement for S-corps, C-corps, and limited liability companies taxed as corporations.
- Owner’s draw: in simple terms, it means simply taking money from your business to use as you wish. In this case, paying taxes upfront every time you take a draw is not necessary.
The perks of an owner’s draw are obvious. First and foremost, it’s all about flexibility. Instead of paying yourself a set amount, your compensation can fluctuate based on your business’s performance. On the other hand, this approach reduces a business’s equity, leaving you with less funds available for reaching your goals.
With regard to the salary, it brings one major benefit to the table: less admin work (simply because taxes are withdrawn from your paycheck automatically). Additionally, salary equals stability; therefore, keeping tabs on your expenses makes the whole process a lot easier. The downside of this approach is the cash flow. What if it gets significantly reduced within a certain period of time? While you can adjust your salary to make yourself feel more or less comfortable, determining how much to pay yourself can be a challenge.
Now that you’re seeing the owner draw vs salary distinction a bit clearer, let’s cover some money mistakes to avoid when paying yourself as a business owner.
1. All of your funds in one account
If you funnel your money into one account, you should seriously reconsider this approach and set two different accounts: business and personal. Because when you put all your eggs in one basket money-wise, you’re not really paying yourself. Instead, you have streams of money coming in with no proper control.
The thing is, when you mix your finances like that, you lose the ability to effectively monitor the state of your operation. Under these circumstances, developing and sticking to a budget is very challenging. As a result, you usually end up overspending and failing to set and achieve long-term goals.
Furthermore, when funneling all your funds into one single account, you run the risk of missing deductions. With so much data to process, succeeding in doing proper accounting will take you a thousand years (meaning you’ll most likely fail to do it in the long run).
2. Drawing money out every time it comes in
This is not the best self employed paying yourself strategy either. Yes, the temptation to employ it and spend all that cash pouring in is pretty strong, particularly if you’re operating a service-based business and, thus, get paid on a daily basis. However, this approach may leave your business high and dry when the time comes to pay your bills.
In addition to putting your entire operation at risk, drawing funds out every time they come in also endangers your personal financial situation and traps you in an illusion that you can spend limitlessly. $300 today, $600 tomorrow, $200 the next day — binge buying is addictive. However, your funds are not limitless. And your business requires paying bills and saving up for goals.
3. Forgetting to invest in yourself
The other side of the splurging coin is not paying yourself altogether. This may be a logical move when you’re just starting out, but following this strategy on an ongoing basis is just not wise. Financial compensation should be part of your business draw. All your financial plans should include the ‘how much should you pay yourself’ point if you want your business to grow.
Tips for Preventing These Errors
One major recommendation we have for you: work up and stick to an owner pay schedule. An owner pay schedule revolves around an established amount that you pay yourself on a regular basis. It takes into account all your vital financial data: your business expenses, tax savings, your personal spending, and long-lasting aspirations.
An owner pay is not just a nice-sounding amount; it’s a vital strategy to hold on to. And it’s the number you thoughtfully calculate in accordance with your financial needs. As a matter of fact, if you manage to pinpoint this number and follow this rule, you are bound to succeed in sustaining yourself on all levels of your entire operation.
Regularity is key when it comes to sticking to the owner pay schedule. Setting up an automatic business owner salary percentage transfer or scheduling a time to sort it out every month would be a very smart move. That way, your chances of keeping your money affairs in order increase tremendously.
Determining how much to pay yourself is vital. There’s no formula to help you along the way, but these factors are must-consider in this respect:
- Business structure;
- Growth and performance;
- Personal needs;
- Reason and moderation.
Last but not least, equip yourself with high-quality expense management tools like Saldo Finance. It’s time-saving, cost-effective, risk-proof, transparent, and exceptionally secure. Expense management automation is a solution that gives your business a competitive edge in comparison with other entities that don’t use it. With a solid money management platform at your disposal, you will control your spending, bolster employee productivity, and save heaps of your precious time along the way.
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