If you’re asking this, you probably run a sole proprietorship. Here’s how to compensate yourself.
Answering the question, how do small business owners pay themselves is vital if you have any designs on starting and running a profitable business. The temptation is to put all your money back into the business so it will become self-sustaining. But in the meantime, you have to eat!
In the following article, we’ll show you how to go about keeping your business operational while also giving yourself the needed capital to live on. Let’s begin!
How Do Small Business Owners Pay Themselves? They Start with Business Classification
There are different ways to classify your business. Three, in particular:
• Sole proprietorship: Where the business and the owner are one and the same, and income is reported as such.
• Partnership: Two or more individual business owners or entities join forces to move toward a common goal but maintain autonomy in their overall business. Sole proprietors can form partnerships but they would continue to pay themselves as sole proprietors.
• Corporation: corporations are a group of business entities that function as a single entity by law.
Payment-wise, the corporation makes payment to the individuals through salary and benefits.
Because more than 70 percent of all small businesses are sole proprietorships, the remainder of this article will focus on how to pay yourself as a sole proprietor. Let’s continue!
1. Calculate All Forms of Revenue
When calculating your sole proprietorship payroll, you need to bring together all forms of revenue, from products sold to services rendered. (Don’t worry. Not all of this information will be taxable.)
2. Add Up Your Expenses
You won’t know your true sole proprietor salary until you’ve taken the time to calculate expenses. In the beginning, list out every expense from what it takes to run your business to how much you pay for groceries each month. (Don’t get excited; groceries aren’t usually deductible.)
3. Separate Personal from Business
You’re closer to learning your full sole proprietorship income, but you still have one very important step to take. That’s separating the personal expenses from the business expenses.
You may wish to secure the help of an accountant for this part. They can help you decipher the clear business expenses from the personal, and they can figure out the options you have for any gray areas.
Sample gray area: you need the Internet for work but also use it for recreation. How you handle that will ultimately affect your taxable income.
4. Make the Payment
A self-employed salary consists of your revenues minus your business expenses. From there, you can determine the amount of taxes that you pay which will depend on your overall income bracket.
As a sole proprietor, the profits of your business are income. That’s what you’ll list as your salary. And that’s what local, state, and federal entities will acknowledge when calculating what you owe.
Logistically, you’ll pay yourself from whichever account the money goes to. Remember: you and the company is one and the same.
5. Find a Way to Track It
Paystubs are among the best tools for tracking what you’ve made, how much you’ve paid in taxes, and what your benefits are costing you. Finding a way to simplify this process is vital.
It helps you know where you are at all times financially and this leads to avoiding large tax bills each April 15. Click here for more information on how to simplify the administrative process.
And That Is How You Do It
So if the question of how do small business owners pay themselves has kept you from starting a business, you now know the answers. Don’t let it intimidate you.
This is something you can do. And while you’re here, check out more of our entrepreneurial tips and advice to help you along. Best of luck on your journey!