Do you run a small business?
Do you struggle with managing your company’s finances? Are you able to set aside for yourself and your family without disrupting the cash flow of your business?
A recent survey revealed that about 41% of small business owners in the United States face cash flow struggles. These problems affect small business owners beyond the financial aspect. Around 56% said that the struggles had a consequential emotional impact.
There is also the question of how should you pay yourself as the business owner.
The answer can be very tricky. There are certain factors that you need to consider especially when you are the boss.
If you want to know how to pay yourself as a small business owner correctly, continue reading below.
How to Pay Yourself the Right Way
Regardless if you are running a small business or a freelancer who works alone, you need to pay yourself. If you have people working under you, you need to set up a payroll system. If you are doing things by yourself, there is payroll for self-employed people.
1. The Structure of Your Business
First, you must consider the structure of your business.
The most common structures include sole proprietorship, partnership, limited liability company (LLC), corporation, and cooperative. The corporate structure has five types, namely, the C Corp, the S Corp, the B Corp, the close corporation, and the non-profit corporation.
If you’re starting small with a few trusted friends, an LLC might be the better option. It ensures everyone has a firm grasp on the company’s finances and ownership. This guarantees no one can out-profit the other, an issue that can happen in a traditional partnership.
We advise that you sit down with your trusted accountant regarding your payroll options in relation to your business’ structure.
2. Identify the Appropriate Payment Method
There are two common types of payment methods that small business owners tend to use: the owner’s draw and the salary.
If the structure of your company falls under a sole proprietorship, LLC, or partnerships, the IRS considers you as self-employed. Hence, the owner’s draw is the one for you. This is because you are not paid through traditional wages.
Keep in mind, however, that you still need to pay your individual taxes even if the owner’s draw is not taxable upon withdrawal.
Traditional salaries, on the other hand, work for C Corps and S Corps. Salaries are recurring payments. Unlike the owner’s draw, the IRS imposes taxes on salaries.
3. Compute an Amount
Now that you have determined that suitable payment method, you can move on to the amount of pay you should receive.
To avoid overpaying or underpaying yourself, you need to look closely into your daily duties. Determine an amount that equates to your daily business tasks. You should also consider how the amount impacts your business’ long-term growth.
Review your profit and loss statements and zoom into your monthly net profit. Take out your desired pay from the net profit. Do you find the pay fair and justifiable?
Identify the major duties you have in relation to your business operations. Find out how much you would pay if you hire someone else to do those things. The amount can serve as a guide to how much pay you can take from the profit.
You should also consider looking at the standards set by the industry.
How much do your competitors pay for services? How much do they pay their employees? How do they break down salaries and how do factors like hours worked, experience, and seniority in the company come into play?
4. Schedule Your Payroll
You need to follow a payroll schedule even if you only have one or two employees working for you. The usual pay schedules among companies in the United States are twice a month, bi-weekly, or weekly.
Majority of the states follow a basic payroll calendar. If your state enforces one, then you should abide by all means.
Not many companies consider one important factor: collaborating your schedule with local, regional banks. Some banks are strict in releasing credit cards or loans to employees and require a weekly or bi-weekly direct deposit account. You can support your business and manage cash flow by sticking to the schedule your local banks abide by.
5. The Mode of Payment
Lastly, you need to determine how you are going to get your paycheck. You can deposit your salary directly into your bank account. You can also write a check if you wish to.
Which modes of payment should you prioritize?
Direct bank deposits should be the primary method available. You should also consider methods such as PayPal. PayPal is great for people hoping to save money since it’s always online and you can’t simply withdraw the cash from an ATM.
As mentioned, checks should be an option for those who prefer a more traditional method.
Bonus Tip: Fragment Your Pay
One extra tip is to fragment your own pay. It’s likely you already have a spreadsheet of different bills to pay, employees to pay, and personal desires to purchase. You should set your account to automatically pay these things out upon receiving your own pay.
This guarantees you won’t forget to pay out anything. The money left in the account is purely a surplus you can spend on business expansion and personal wants.
Grow Your Business and Eliminate Debt, Today!
Taking your small business to the next level requires patience and the thirst for learning. The same thing goes for eliminating your family’s debt. Following these tips should help you pay yourself, keep your business afloat while also guaranteeing steady growth and expansion.
If you are struggling in both areas, we encourage you to get in touch with us. Simply fill out our contact form and take the first step toward becoming debt-free. Don’t hesitate to speak with the professionals to get back on solid ground!