Should I Take a Salary from My Business?
If your business can support it, you should pay yourself enough to live on but be realistic about what you need. Subtract the cost of your business’s expenses from your gross revenue to find your net income. Subtract the amount of taxes you need to set aside and pull your pay from this figure. Calculating your net income first will ensure your business can cover its expenses.
If your business is debt-free, pay yourself a salary based on what your skillset is worth. You should aim to build 3 to 6 months of operating capital from your profit. If you have business debt, stick to a living wage for your W-2. Set aside 15–20% of even the smallest monthly profits for retained earnings to pay off debt. You should always budget for future expenses.
The majority of small business owners pay themselves by taking a salary or through an owner’s draw. A salary is when you pay yourself, just as you would your employees, through payroll. If profit is unpredictable, pay yourself through periodic draws. Salaries are subject to federal income tax, Social Security, and Medicare taxes.
Through an owner’s draw, you withdraw money from the company’s checking account as needed without withholding employment taxes. An owner’s draw is not subject to payroll taxes, but you will pay self-employment taxes on your share of the business profits through your personal tax return. The type of business you set up can impact your salary as an owner as well as your small business’s tax obligations.
Talk with an accountant to find the tax specifications required for your business and to avoid any tax penalties. You are the financial steward of your business. Many small business owners do not take a salary in the start-up years as they get established. Taking too much could limit growth or even possibly bankrupt your business. Once your budget, business debt, and reinvestments are factored in, you’re not cheating your business to receive a deserving salary.
