How To Pay Yourself As A Small Business Owner
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All the hard work and long hours don’t go to waste as your small business begins to grow. Your savings account balance begins to rise, there’s less stress surrounding paying suppliers, and you may even be considering hiring your first employee.
But what about you? Your hard work is paying off and it might be time to consider paying yourself. There are two main ways small business owners can pay themselves: a salary and a distribution. Both come with advantages and disadvantages that need to be considered.
Paying Yourself As A Business Owner
The first option when it comes to taking money out of your small business is a salary. A salary means you get paid like any other employee with regular payments made on a pre-determined basis. Setting up a salary ensures you get paid regularly, assuming you have enough cash in the bank to cover the amount.
However, you will be assessed payroll taxes on your gross pay. In addition to employer taxes, you must also remit taxes at the employee level and report the amounts as income on your individual return. This might result in a higher tax liability.
Taking a salary from your company gives you the ability to plan for retirement through regular contributions while creating an additional business deduction. Wages and employer payroll taxes are qualifying business expenses, reducing your taxable income at the business level.
The other option for taking money out of your business is through a distribution, sometimes referred to as a dividend. This is pulling money directly out of your business without running anything through payroll. As a result, the money taken out is tax-free.
There are tax implications to be aware of if you are selling your company in the future. When you pull money out of your business, you are reducing your basis in the company. Your basis is all the money you contributed, earned, and withdrew. The lower your basis is, the more taxes you may need to pay when you sell your business.
Sole traders often don’t have any basis in their business since all income and loss are reported directly on the individual return. Additionally, if you have partners, you may be limited on the amounts you are able to pull out when partnership agreements are in place.
Choosing The Right One
Due to the advantages and disadvantages of each, many small business owners choose to take a combination of both a salary and distribution. This helps maximise tax savings.
Another important decision you will need to make as a business owner is your insurance. Finding the right coverage is essential to cover all your bases when a lawsuit arises and to give you peace of mind in your day-to-day operations.
To weigh all of your options, use our instant quote generator, where you can get an estimate on market-leading insurance in seconds! Simply enter your occupation and expected revenue to get started! For more information, contact a team member today.