takeing out a salary as a small business owner

Should You Take Out a Salary as a Small Business Owner

December 11th, 2019 Posted by Bookkeeping Tips 0 thoughts on “Should You Take Out a Salary as a Small Business Owner”

Should You Take Out a Salary as a Small Business Owner

As a small business owner, you most likely got involved with your work because you have a
genuine interest in providing your product or service. Paying yourself is, of course, important,
but it is not one of the major issues you concern yourself with as an entrepreneur. Too often,
small business owners neglect to figure their own pay out at all and decide that they will
prioritize themselves last. Too often, small business owners neglect to take out a salary, especially in the beginning. However, this is a mistake that could have both personal and business consequences.

The reasons for potentially paying yourself last seem obvious: put as much of the profits back
into the business to help it grow. But, in fact, this is not the best approach for long term business
viability. Paying yourself first, most importantly, provides security for you and your family. A
regular income frees you up, at the very least, to cover your basic needs and provide for your
wife and kids. Having a consistent salary also helps motivate you to show up everyday and work
hard. When times get tough on your business, it is essential to have some stability in your
personal life to keep your operations afloat. Additionally, it allows you to start building your
personal savings. This has important ramifications down the road for your business as well. If,
for instance, you want to relocate your business or upgrade your current facilities, having a
personal savings might help you do so. You may have enough savings built up to cover the
entire expense yourself, or at the very least, a solid savings account may help you secure a loan
to accomplish those goals.

Another overlooked yet important benefit to paying yourself a salary as a small business owner is the clarity through which
long-term and short-term goals are laid out. If you are taking out drawings periodically you might
become too obsessed with short-term progress to cover your drawings that you lose sight of the
big picture. The big picture might require some changes to be made that negatively affect the
short-term bottom line. At that point, your need for money comes into direct conflict with the
mission of the company. Once your salary is fixed, however, you and your business can be
more clear about the overall mission. You know exactly how much money you need on a
monthly basis to cover overhead, and as a result, your monthly goals can start to work in
tandem with quarterly, annual, and five or ten year plans. Your monthly goals provide the
stability through which working towards those larger goals is possible.

From an operational perspective, paying yourself a salary simplifies the bookkeeping process
and preparation of your financial statements. You always know exactly how much money is
going to be taken out each month to cover your salary. The alternative, the draw method, gives
your business some flexibility with your wages, but that might come at the expense of your
personal financial situation. It is important to keep in mind that, depending on how your business
entity is set up, you may not always have access to your business’ money for drawings. For
larger corporations, there may be specific guidelines you have to follow to draw money. Even as
a sole proprietor, it is not best practice to just draw money at will either.

Taking a salary is the best way to add consistency to both your business and your personal situation and avoid
running into any issues. Additionally, having a salary appear on your income statements also
looks good to banks and other potential investors by demonstrating a serious level of
commitment and trust in your business.

Another great benefit to taking a salary involves your business and personal taxes. When taking
a salary, your personal taxes are automatically taken out. This makes it less of a headache to
get through tax season. Alternatively, you would have to self-report all the drawings you take out
throughout the year. Then, in terms of taxes, you could pay them in one lump sum or quarterly
throughout the fiscal year. Generally, this involves more quarterly reporting and potential self-
employment taxes as well. Paying yourself a salary, thereby, simplifies your small business
accounting process.

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