Further, this study found that just over 50 percent of small business owners even pay themselves at all. If this scenario rings true to you, consider a different approach. Pay yourself first. Why? Because taking that step reaps benefits, financially and psychologically.
Why it’s important to pay yourself first
1. Financial clarity
One reason to consider paying yourself first is to have a better understanding of where your business is as a whole. Let’s say you run a salon or work as a graphic designer. Striving to allocate funds for yourself ensures that you get a holistic view of your expenses and a better idea of where to adjust to help your business succeed.
What’s more, if paying yourself a salary puts too much stress on the rest of the operation, that may press you to look for efficiencies in your business plan or make changes that will free up extra money.
Many Clover merchants turn to Clover Rapid Deposit to get faster access to their sales funds and free up cash for expenses like salaries or supplies. With clear and easy payback terms that offer businesses lots of flexibility, Clover Capital is another product that merchants reach for to turn future credit card sales into working capital for investing in and expanding their businesses.
2. Stress reduction
There’s no question that operating a small business can be very rewarding, but it can also be pretty stressful. Merchants deal with stresses of all kinds everyday–exacerbated by market events completely out of their control, like the pandemic. This research, for example, indicates that small business owners across the board reported higher levels of stress during the pandemic–especially women.
While paying yourself first won’t solve market problems, it can be a psychological boon to business owners.
It’s a great way to recognize your hard work.Just like employees want and need a paycheck, so do business owners. Starting a small business is something to be proud of. Paying yourself first, however much you’re able, recognizes and rewards you for the time, intelligence, and hard work you’ve invested in your business.
It’s a great motivator. Want your business to grow and be even more profitable? Drawing a steady salary demonstrates to yourself your own commitment to make the business work. It can serve as a tangible motivator to push harder to make your business succeed. You can’t give what you don’t have, as they say. So when you deprive yourself of a paycheck, it can be that much harder to reinvest yourself in your business.
How to pay yourself as a business owner
Although we don’t profess to be CPAs or up on all tax laws relevant to your business, generally speaking business owners have two ways to pay themselves:
- By salary, withholding taxes just as you would pay an employee. According to the IRS, the salary must be “reasonable” as compared with other professionals in your industry. This type of payment is also a predictable business expense.
- By owner draw, meaning you take cash from the profits of your business as needed. The gotcha here is that you can draw up to the amount you put into the company. If your business is doing well, it can definitely provide you some financial flexibility.
The nature and structure of your business–whether your business is an LLC or a corporation, for instance–can help determine your choice. Be sure to check with your accountant for which approach suits your business best.
According to PayScale, the average salary for a small business owner is around $61,000. No two businesses are the same, of course. So, when determining how much to pay yourself, take these factors into consideration: net income, debt, tax savings and reinvestment savings.
- Net income – The gross revenue minus all expenses, including employee wages.
- Tax savings – On average, businesses should stash away about 30 percent of your net income for tax payments.
- Debt – Tally any outstanding debt., including loans, your business has.
- Reinvestment savings – These savings are funds you want to invest back into the business for future improvements or expansion.
So, a simple formula business owners and their accountants can use to determine their target salary is:
Net Income – (Taxes + Debt + Reinvestment) = Salary
The key to successfully paying yourself first is determining a number you can commit to paying yourself regularly.
Paying yourself first recognizes the investment of your time and yourself into your company, and it lays a foundation for a successful relationship between you as business owner and your company–a relationship built for the long haul.
Learn more about how Clover helps business owners manage cash flow to pay themselves and grow their businesses.
This information is provided for informational purposes only and should not be construed as legal, financial, or tax advice. Readers should contact their attorneys, financial advisors, or tax professionals to obtain advice with respect to any particular matter.
Editorial Team
, Run your business, Strategy
Topics: , Run your business, Strategy
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