Why You Should Pay Yourself A Salary

Dear Entrepreneur,

It’s key to remember that as part of your own business, you should get paid. While putting money back into your business for growth is great, it’s also important to set aside some for your own monthly pay. This helps you both grow your business and keep your own financial safety, so you can keep making good choices. When you pay yourself a salary, it shows how serious and dedicated you are to your business.

This article will explain why you should pay yourself a salary, how you can do it, and what things you should avoid when deciding on your salary.

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Benefits Of Paying Yourself A Salary

  1. Financial Security: Regular salary payments can ensure your personal financial stability, helping you meet daily living expenses comfortably.
  2. Reinvestment Control: By taking a consistent salary, you’re less likely to impulsively draw from business profits, enabling strategic reinvestment decisions.
  3. Tax Management: Regular salary payments can simplify tax planning, distinguishing your personal income from business revenue.
  4. Professional Image: Drawing a salary presents a professional image to stakeholders, demonstrating your serious commitment to your business.
  5. Business Health Indicator: If your business can afford to pay you a consistent salary, it’s a positive sign of its financial health and sustainability.
  6. Personal Loan Eligibility: Regular income from your business improves your credibility with lenders, enhancing your chances of securing personal loans or mortgages.
  7. Work-Life Balance Maintenance: Paying yourself a salary promotes a healthier work-life balance, acknowledging the value of your time and efforts.

How To Pay Yourself

As the owner of a business, there are a few different ways you can pay yourself, depending on the structure of your business.

  1. Salary: This involves paying yourself a fixed amount regularly, just as you would with any other employee. This method is straightforward and allows for easy budgeting.
  2. Owner’s Draw: This is a method generally used by sole proprietors or partners. It involves taking money out of the business’s profits. These draws can be irregular and their amount can vary.
  3. Dividends: If your business is incorporated, you can pay yourself through dividends. Dividends are paid out of after-tax profits and are distributed to shareholders, which in a small business is often just the owner.
  4. Loan to Owner: The business can provide a loan to the owner which can be repaid over a period of time. This is not a common method and it’s important to ensure it adheres to IRS rules and regulations.
  5. Rent from Personal Assets: If the business uses any personal assets, such as a home office or personal vehicle, the business could pay the owner rent.
  6. Bonus: Depending on the profitability of the business, an owner can pay themselves a bonus at the end of the year or quarter.
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Things To Avoid While Paying Yourself A Salary

  1. Avoid mixing personal and business finances: It is a common temptation to take out of business funds as a business owner but it is very important that you have a separate account as discussed in our previous article.
  2. Inconsistency with payment: Salary is a fixed monthly income and as much as you might struggle to pay yourself one as a business owner, consistency is very important. You can schedule it monthly to align with the same time you pay your employees.
  3. Changing the Amount: As a business owner, it is important to have a fixed income you pay yourself. The amount should be fixed monthly and if you would be paying yourself a bonus; let it also be the same for other staff members working for you if they are also deserving of receiving the bonus.

Parting Thoughts

The concept of paying yourself first involves setting aside money for savings and investments outside your business before dealing with bills or other expenditures. Though it might seem unusual, it’s an effective strategy to establish a robust financial standing for your company. Your salary should correlate with the effort you invest in the business, as it does for any other employee. It’s crucial not to underestimate the value of your work when deciding on your salary. If you’re single-handedly running your business, the hard work you put in should be adequately compensated. This doesn’t imply you should excessively reward yourself; instead, aim for a balance between your input into the business and the revenue it generates.

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