How to pay yourself as a business owner: Salary or Draw

How to pay yourself as a business owner: Salary or Draw

Any business, small or big, needs time, money and commitment. But once you have successfully established your enterprise, it is time to pay yourself for all the efforts. While you can either pay yourself a regular salary or through a draw based system, there is no one right way to handle your compensation.

Read on to know how you should be paying yourself as a small business owner.

Regular salary

As the name suggests, in a regular salary system, you are on a company’s payroll and take home a fixed check for your contribution to the organization. Your salary is decided basis your company’s fiscal health, your experience and skill sets, and your business model. It includes various withholdings like for medicare, social security, and state and federal taxes.

Advantages

  1. A regular, scheduled payment gives you a clearer picture of your company’s financial condition.
  2. It gives you the eligibility of receiving the pension once you reach a retirement age.
  3. You can easily apply for credit or loan basis your salary.

Disadvantages

  1. You have to pay all taxes and contribute toward employee pension schemes.
  2. You get fixed salary, like any other employee of the organization.

How to add yourself as an employee and run payroll

To add yourself as an employee in QuickBooks,

  1. Login to your QuickBooks Online account.
  2. On the leftmost panel, click on the Employees tab.
  3. Click on the Add Employee button.
  4. Now enter all your information.
  5. Click Done to finish.

Draw or distribution

In this, you have the option of taking additional money from your company that’s above and beyond your regular salary. Checks for draws and distributions are written without the need to pay taxes. Sole proprietors and members of partnerships are free to take draws from Equity. This is just like any other banking activity and payroll withholdings do not apply.

Advantages

  1. Draws involve lesser administrative headaches.
  2. You can take home all the profit that your company is earning.
  3. No federal or state income tax is deducted.

Disadvantages

  1. Draws bring down your business capital.
  2. Your monthly income varies on the basis of your company’s profit or loss.
  3. You are not liable for any employee benefits.

Whether you go for salary or draw is completely your choice, but here are few factors to consider before making your decision:

Account your personal responsibilities

Track your expenses to know how much money you need to withdraw from your company in the form of salary. Determine your utility and grocery bills and know how much money you need to cover up your insurance and emergency funds. This would give you a baseline for how much money you will need at the very minimum.

Access your company’s fiscal health

Before you decide how you should pay yourself, make sure you have an accurate and up to date information on how your business is doing. Also analyze if your bank accounts will continue to show positive balance in the near future as well. This will give you a deeper insight about the long-term vitality of the organization.

Focus on checks but do not forget balances

This is the most important lesson to ensure the sustainability of your business. So, while you ensure a fair compensation amount for yourself, do not forget to create a budget for your organization so that all your operations stay lean and cash flow stay positive.

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Make sure you follow this checklist regularly to keep your business finances in order and ensure that your business is heading in the right direction. Small business owners often find it hard to record there financials or maintain there books of accounts. Thus if you are also facing the same issues then you can get in touch with us. You can call us at our Quickbooks proadvisor support number at 1800-940-7442 to get instant accounting support.


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