How do I get paid as a biz owner?
Let's talk owner compensation. One of the most common questions we get asked by new business owners is about how to and how much to pay themselves. We'll break down the basics here, but as always, it is best to consult with a professional to make sure that you understand all of the nuances of your situation. So, let's get to it...
"How do I pay myself?". The answer to this depends largely on the tax structure that you elected for your business.
Sole Proprietor and LLC owners get paid with "owner draws" or "owner distributions". These payments to the owner are NOT payroll, and do not have payroll withholding taken out.
Corporation (including S-Corp) owners pay themselves with a salary, which are subject to withholding, and can also take dividend payouts.
"How much should I pay myself?". This gets a little more tricky, and I've broken it down in a quick video, here.... But, I'll line out the basics below.
Sole Proprietors and LLC owners:
There is no one-size-fits-all number for this, but generally speaking, you can follow this formula:
Net Profits - 30% for taxes - Expenses - Savings = Available Funds
Always save 30% (or the amount your Tax Professional has recommended) for taxes.
Ensure that all of the Expenses for the business are covered (You can't really run your business if you don't have electricity).
Add monies to your business savings to ensure that any unexpected events are covered. A good rule of thumb is to have 3-6 months of business expenses in your savings, just in case...
NOW, Once you've done all of that, you have the Available Funds remaining. It is up to the business owner's discretion... Pay yourself the amount that meets your needs, but try to remember that as you grow and scale, having available funds in the business will help expedite that process.
Corporation Owners:
Owners will be paid a salary, that works the same way as any employee of the business. These salary payments will appear in the books the same as all other payroll expenses.
It is common for small business owners, or new business owners to pay themselves a modest salary. It must be a salary that the IRS would deem "reasonable".
Owners can supplement their salary with dividends from the business' profits.
So, there you have it! The (very) basics of how business owners are compensated depending on the business structure and business' ability to provide those payments. Again, if you are a business owner establishing your pay, it is always best to seek out the help of a tax or payroll professional.
