How Much Should Business Owners Pay Themselves?
March 2, 2017
by Anthony Blunt
It’s the time of year that some love and others love to hate – tax season! Determining how much to pay yourself as a business owner can be challenging, especially when you consider the tax bill that comes with it. It’s important to the future of your business that you pay yourself properly, so here are three tips to help you do exactly that this tax season…
Know the Significance of Your Business Structure
The way the IRS views the profits of a business and the income of an owner varies depending on the type of business. A sole proprietor’s business profits are considered personal income by the IRS, but the owner of a corporation must pay themselves just as they pay their employees. Consult a qualified tax advisor if you are unclear as to how this applies to you and your business. It’s better to get it right now than having to pay later!
Keep the Future of Your Business in Mind
No one wants to pay more taxes, but everyone wants to make more money! Your tax advisor or CPA wants to help keep your tax bill low – even as your income gets higher. It's important they understand what your plans are for the business because lowering your tax bill now could potentially diminish your ability to obtain financing in the future when you are ready to grow
or have a need to increase cash flow
. If you are planning to expand and will need financing, be sure your advisor or CPA knows.
Don’t Rip Off Yourself and Don’t Rip Off Your Business
You work hard as a business owner and your hard work deserves fair pay. Your pay should not be determined based on how much you want to pay or not pay in taxes. Be sure you are not ripping yourself off by not paying yourself enough in an attempt to avoid paying Uncle Sam. At the same time, you also don’t want to go crazy and pay yourself too much just because the money is there. Paying yourself too much will only prevent your business from growing. If you consistently pay yourself too much, you could even cause your business to fail! It’s important you monitor your net profit along with your total income and increase your personal income proportionate to your increase in profits, not just an increase in sales.
This tax season doesn’t have to be as painful as the last, and you can walk away confident that you did the right things for yourself and your business. So go ahead, pay yourself and pay yourself with joy knowing that you are worth every penny. Even if that means paying a little more in taxes!
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