Many business owners think that there is no need to pay themselves when building a business. Especially when business profits are still minimal, business owner salaries are often the last priority in small business budgets. However, when business revenue is more stable, paying yourself is worth doing. Yes, as a business owner, it is important to include your own salary in your business expense plan. “I recommend paying yourself a modest salary, as modest as you can afford,” says Whitney Delaney, founder of Delaney Tax & Wealth Management. So, what is the right way as a business owner to earn money or salary for yourself? Take a peek at the explanation in the following article.
Why do business owners need to pay themselves?
In the beginning of your business, you may choose to work for free, as the business is not yet profitable. But this should not be done for long. After all, the time and energy you put into building your business has value. It’s not just for the money, but also for your mental health and ability to keep going. Successful business ownership is about being able to thrive financially and provide for yourself. Also, if you don’t have an income as a business owner, this can affect your personal finances, which can be detrimental. Alice Bredin, an American B2B marketing entrepreneur and small business advisor, says not allocating funds to pay yourself will lead to inaccurate bookkeeping. By accounting for all your expenses, you’ll know whether you need to raise prices, market more, cut costs, or make other adjustments that help your business grow.
Things to Consider in Paying Yourself
A business can be considered ‘proft’ when the founder no longer uses personal funds for business needs. In other words, the founder must have a salary from the business he or she is building. Start with the discipline of paying yourself a small salary. Then, once the finances in the business start to increase, increase the amount of the salary until you can eventually hire and pay employees with a decent wage. So, what are the things that business owners need to consider in determining their own salary?
Set a Reasonable Salary
Make sure the salary you take is in balance with your role and responsibilities in the business. Consider industry and local standards to make your salary competitive. Don’t forget to consider the company’s financial ability to pay your salary without compromising liquidity.
Personal and Business Financial Calculations
It is important to evaluate your personal and family financial needs. In addition, consider the financial condition of the business. Make sure the salary taken does not threaten the financial stability of the business and is sufficient to meet personal living needs.
Performance Evaluation and Flexible Salary Plan
Regularly evaluate your business and personal performance. Set a flexible salary plan that takes into account achievements, positive contributions to business growth, and the company’s financial condition. This allows for fair salary adjustments based on performance and changing business circumstances.
How do business owners pay themselves?
As a business owner and entrepreneur, you can pay yourself in several ways. Which one to choose depends on a few things, such as how much you want to be paid, the type of business you run, and which system you find most efficient.
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But as reported by Thebalance, here are some ways that entrepreneurs pay themselves that you can follow:
Withdrawal by Owner
This method is best for limited liability companies, partnerships, and sole proprietorships. Owner withdrawals can be the best way to pay yourself for these three business structures, distributing funds as needed throughout the year as the business grows.
Pros:
- Ideal for businesses that start with low or inconsistent cash flow.
- Compensation can be flexible and adjusted based on performance and business profits.
- Suitable for businesses with cyclical or seasonal profits.
- A common option for owners who do not yet have business funds to pay themselves a fixed salary.
- Payroll can be done periodically or as needed
Disadvantages:
- Reduce overall business equity and cash flow
- Easy to withdraw, cutting business profits and future growth
- Requires careful budgeting, tax planning, and record keeping
Salary
This method is best for S corporations (corporations taxed as partnerships), C corporations (paying tax on profits and their owners paying tax on dividends received), and non-profit organizations.
Pros:
- The easiest way for business owners to pay themselves a salary.
- Pay the business owner a fixed salary at regular intervals.
- A consistent salary allows the owner to meet personal expenses consistently.
- Ideal for more stable businesses with consistent cash flow.
- Financial consistency and salary stability.
- Makes it easy to track expenses and manage cash flow.
Disadvantages:
- This method does not take into account any fluctuations in business expenses.
- Salaries and dividends are considered personal income and are taxed accordingly.
- Earnings may fluctuate and may not meet your salary.
KH Contact
Managing your salary as a business owner can impact some important personal and business tax decisions. For these considerations, you can first consult with professional experts, one of which is Contract Law. Through our Digital Business Assistant (DiBA) subscription service, we have been trusted by more than 5000 businesses and companies in Indonesia in solving their business backoffice needs. The services provided include financial records, taxes, unlimited consultations, to other legality needs such as IPR, contracts, and business licenses, all in one place at DiBA Kontrak Hukum! Guaranteed to be more practical and affordable when compared to setting up your own team, using accounting firm, law firm, and accounting software services.
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What are you waiting for? Make all your business needs easier by visiting the KH Services – DiBA page. If you still have questions, you can also consult for free at Tanya KH or send a direct message (DM) to Instagram @Kontrakhukum.
