As a business owner, you probably wonder how to pay yourself from your business. There are a few different ways to go about this, and each method has its own benefits and drawbacks. This blog post will explore the two most common ways to pay yourself from your business: owner draws and salary. We will also discuss the pros and cons of each method so that you can decide which one is right for you.
What is an owner’s draw?
An owner’s draw is a distribution of profits to the owners of a company. This amount can be distributed in different ways, such as through salary, dividends, or distributions. Ownership in a company entitles the individual to receive a portion of the profits generated by the company. It is important to understand how an owner’s draw works and what tax implications are involved. By understanding the basics of an owner’s draw, business owners can make more informed decisions about their company finances.
Salary of a business owner
As a business owner, you oversee all aspects of your company and ensure it is successful. But what does that mean in terms of salary? How much do business owners make compared to other professionals? In this blog post, we will explore the different factors that play into a business owner’s salary and provide some insight into how much money you can expect to make. So, whether you are just starting out or thinking about becoming a business owner, read for more information!
You can take a salary or an owner’s draw from your company’s profits. While both methods have pros and cons, the ultimate decision comes down to what makes the most financial sense for your business. In this blog post, we’ll dive into the key considerations you should consider when making this decision.
Owner draw vs salary
Many business owners are unsure of how to compensate themselves. Should they take a salary or draw against the company’s profits? Both options have pros and cons, and the best decision depends on the situation. This article will explore the differences between drawing and salaries and help business owners make the right decision.
There are two primary methods of compensation for business owners: a salary or an owner’s draw. A salary is just like any other employee’s salary, a set amount paid out regularly (usually weekly or bi-weekly). On the other hand, an owner’s draw is a distribution of profits that can be taken at any time and in any amount. So, how do you decide which method is right for you? Let’s take a closer look at the key considerations for each option.
Salary Considerations
Taxes
One of the biggest benefits of taking a salary is that it simplifies your taxes. With a salary, taxes are withheld automatically, so you won’t have to worry about making estimated tax payments throughout the year. This can be a big advantage come tax time.
Paperwork
Another benefit of taking a salary is that it streamlines your paperwork come tax time. When you take an owner’s draw, you’ll need to track all the money you’ve withdrawn from your business throughout the year to correctly report it come tax time. This can be complex and time-consuming if you’re not keeping meticulous records.
Unemployment Insurance
If you pay yourself a salary, you’ll be eligible for unemployment insurance if your business experiences hard times and you need to let go of employees. This safety net can be extremely helpful if your business hits tough times and you find yourself out of work.
Owner’s Draw Considerations:
Flexibility
One of the major advantages of taking an owner’s draw is that it gives you greater flexibility in how and when you’re paid. You can take out as much or as little money as you need with an owner’s draw. This can be helpful if your financial situation changes unexpectedly or your business hits a slow period and cash is tight.
Simplicity
Another advantage of taking an owner’s draw is that it tends to be simpler than a salary. When you pay yourself a salary, you’ll need to run payroll and withhold taxes, which can be complex and time-consuming. If you opt for an owner’s draw instead, you won’t have to deal with this additional paperwork.
Taxes
One potential downside of taking an owner’s draw is that it can complicate your taxes come tax time. With an owner’s draw, no taxes are withheld upfront, which means you may end up owing money come April 15th if you haven’t been paying estimated taxes throughout the year. This can be a disadvantage if you’re not good at saving money throughout the year or if your financial situation is unpredictable.
The bottom line is that you can pay yourself a salary or an owner’s draw from your company’s profits. While both methods have pros and cons, the final decision comes down to what makes the most financial sense for your business. We’ve outlined some key considerations to consider when making this decision so that you can choose what’s best for you and your business.
Now that you have a general idea of how to pay yourself from your business, I invite you to sign up for this free mini-course, How To Pay Yourself From Your Business, that goes into deeper detail on how to pay yourself and the steps to take in your business to determine how much to pay yourself as well.
