A safe starting point is 30 percent of your net income. If you have an accountant or tax preparer, ask them what percentage of your net income you should save for taxes.
Most small business owners pay themselves through an owner’s draw. The IRS views owners of LLCs, sole proprietors, and partnerships as self-employed. As a result, they aren’t paid through regular wages.
To determine your salary, build a dream budget for your personal life. Identify how much money you spend each month. An ideal budget exists, but what is it for your life? Well, let’s break it down into percentages to help you identify your dream budget. 50% of your income should go towards your needs.
Payment Methods for Small Business Owners
Business owners can pay themselves through a draw, a salary, or both. A draw is a direct payment from the business to yourself. A salary goes through payroll, and taxes are withheld. The combination method means taking part of your income as salary and part of it as a draw.
Considerations in Paying Yourself
Some experts think you should take only what you absolutely need to survive, while others believe your salary should be based on market value. It is best to have some kind of limit on how much you take out to avoid putting your business at risk. Limit yourself to maintain financial stability.
If you are using the owner’s draw method, you should keep a part of every draw aside for taxes since they aren’t deducted upfront. As a business owner, you also have to pay taxes on a quarterly basis; accounting software can typically help with that.
The manner in which small business owners compensate themselves is mainly determined by their business structure. Instead of a wage, the majority of owners receive a draw, a distributive share, or dividends.
Once you have determined how much you should pay yourself, you need to figure out the best payment method. The two most common methods are salary and draw. A salary is a fixed amount of money you pay yourself every period.
Conclusion
Running a small business is full of stresses, including figuring out how much to pay yourself and how to do it. Find out about your options and how to balance your business needs with your personal ones.