The love of the business is a great motivator, but it doesn’t pay the bills. Establishing a compensatory plan is important to ensure financial health and compliance.
The most common method is an owner’s draw, but other options exist. The best approach will depend on your business structure and personal finances.
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4 Effective Strategies for Paying Yourself As a Small Business Owner
Set Up a Separate Business Bank Account
Having a business bank account may seem like a hassle, but it’s one of the most important steps you can take for your small business. It makes accounting and payment processing easier and keeps your personal and business expenses separate, which is vital for preventing IRS headaches.
Even if you’re the sole proprietor of your business, it’s a good idea to open an account. You can write off certain expenses on your tax returns, and keeping a paper record of all business transactions will be helpful in case the IRS audits you. It is, moreover, one of the different ways to pay yourself.
It can also make it easier to apply for credit cards or loans in the future, as lenders will want to see that you have a history of handling your company’s finances responsibly. Keeping personal and business expenses separate can also help protect your assets if your company gets sued or goes bankrupt.
A separate business bank account will also give your company a more professional image. Using your account to handle business payments or transactions can look sloppy and unprofessional, which may not inspire trust in potential clients or suppliers. Moreover, some business accounts will have features that help teams collaborate on finance, such as multiple user roles. This can be an especially great option if you plan to hire team members in the future to manage your company’s finances.
Indeed, a separate business account sets a solid foundation for financial management in any budding enterprise. This becomes particularly important in the context of Ecom CPA. These professionals thrive on clear, organized financial data; a distinct, adequately managed business account is a crucial starting point. An Ecom CPA can provide accurate cash flow analysis, essential tax preparation, guidance on business expansion strategies, and much more. This extends beyond mere professional image to sheer profitability and growth, particularly in the dynamic e-commerce space.
Set Up a Credit Card for Your Business
It’s important to understand that the method you use to pay yourself will directly impact how you manage your business. Reviewing your compensation strategy frequently is also a good idea, especially as your business evolves. This will help you stay on track as you consider the next steps for your company.
Using a credit card to pay for business expenses can be a great way to keep your personal and professional spending separate. It can also allow you to earn cash back or points on purchases made for your company. Additionally, some business cards offer a 0% introductory APR on purchases or balance transfers for up to 12 months for new cardholders.
Another benefit of a business credit card is that it may help you establish or maintain your business credit score. An active business credit card will show that you are a consistent spender and may make you a more appealing applicant when you need to apply for business financing.
If you decide to draw from your business, consult with a wealth advisor or CPA about the tax liability associated with this distribution. They will help you determine how much profit to withdraw from your business and the best way to do it.
Create a Payroll Schedule
There are several different payroll schedules to consider, depending on the kind of business you have and your employees’ needs. Weekly payroll schedules are the most expensive and time-consuming to manage, but they are best for hourly employees and companies that generate a lot of overtime hours. They help match hourly payroll expenses to changes in business income, such as when your restaurant is busy on holidays or weekends and you need more employees to cover extra shifts.
Biweekly pay schedules are more cost-effective than weekly payrolls, but they still require a lot of payroll journal entries each month. Employees know exactly when they can expect their paychecks, making budgeting easier. This is the most popular payroll schedule for salaried employees, but it can also work for hourly employees if you use it rotationally.
Monthly payroll schedules are the least preferred by employees, especially when they are paid only once per month. It can be hard for them to keep track of their spending and stay on top of their bills. It’s also more difficult to make automatic payments for health insurance or subscriptions when employees are paid only once a month. You’ll also need to make a lot of additional payroll tax deposits when using a monthly payroll schedule.
Set Up a Savings Account
Consider putting your business in a savings account if it is profitable enough to leave you with extra cash. This type of account offers better-than-average interest rates and allows you to withdraw funds at any time. It’s also ideal for achieving short-term financial goals or stocking an emergency fund. But when shopping for a savings account, weigh fees against the APY to ensure you get a good deal.
Especially for small business owners, choosing an account with no fees that chisel away at your earnings is important. Check out the terms and conditions to see how many monthly fee-free transactions, mobile deposits, or ACH transfers your savings account allows. It would help if you also considered whether the account has any restrictions, such as a limit on cash deposits or ATM withdrawals, to avoid being hit with unexpected charges.
As a small business owner, it’s critical to professionally manage your business finances and keep them separate from your accounts. A business bank account helps you do that while providing access to services that make your life easier, such as online banking, cash back on debit card purchases, and easy-to-use mobile apps. In addition, the right business credit cards help you earn cashback while managing your expenses. Finally, a good savings account can help you achieve your business’s financial goals while giving you peace of mind that your money is safe.