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Running a business is a dream for many people, but once they achieve this goal, they have a variety of questions, including how to pay themselves. When reading the guidelines from government agencies and organizations, the process can seem complicated and frustrating. However, learning more about your payment options and what approach works best for you and your business can make the situation less challenging.
A Draw
Taking money from your company’s profits and the capital you’ve previously given to the business is a method many individuals use to pay themselves. You’ll obtain this draw by writing a check or depositing the funds into your personal banking account. If you choose this method, you can take fixed distributions as often as you need or establish a regular payment date and period.
Many benefits come with a draw, such as greater flexibility. You don’t need to maintain a regular cash flow within your business when using this payment option. However, things to consider are that it could reduce your company’s equity, and your taxes are only deducted once at the end of the year.
Salary
Salary is a set amount that goes through your business’s payroll process. Once you establish the payment period, you can use this option with payments. If you use this method, taxes are generally withheld from the paycheck during that period and sent to the Internal Revenue Service (IRS) on your company’s behalf.
One of the benefits of using a salary to pay yourself is that it allows your company to anticipate cash needs and avoid potential setbacks. The predictability makes it a better option for many business owners. You can also pay your taxes promptly, reducing the risk of fines and fees. Salary requires less administrative work, but your business must have a regular cash flow.
Combination Methods
Combining your income as a partial salary and the other part as a draw or distribution is another option for business owners to consider. If you select this method, your business structure and tax requirements should be significant factors. Some payroll providers and commercial insurance companies can handle this payment option, ensuring you meet all requirements and comply with relevant regulations.
Things to Consider
Once you’ve chosen a payment method, deciding how often you plan to pay yourself is essential. You should consider quarterly payments to stay on pace with taxes. However, you can pay yourself weekly or biweekly, which are the most common choices for many business owners. Remember you can pay yourself more and as often as you would like. Regardless of what method you select, stay consistent with a schedule.
Reevaluate the payment process at least twice a year to ensure it maintains your standards, and make any necessary changes. The objective is to meet business obligations and goals as well as your personal needs.
Business owners also need to make sure they protect their companies and employees by purchasing the right insurance coverage. For affordable, reliable business insurance as well as homeowners, renters, motorcycle, and auto insurance, National City residents should call on the trustworthy professionals at Altra Insurance Services. Reach out to us today to learn how we can satisfy all your insurance needs.