Navigating the Financial Impact of Business Owner Payout
There’s no question that an owner of a small business deserves to be paid (just like everyone else). However, there are certain implications to paying oneself as the owner that are worth understanding before writing yourself a check.
At 1428 Financial, we believe in helping educate all of our clients on their options when it comes to business owner payout. One of our business uniques is taking the time with our clients to map out your average profit, tax requirements, and payout opportunities.
In our opinion, the more you know, the more independent you can be with your financial choices. While we are always here to help as qualified bookkeepers, we believe in helping set you up for optimal success so you can further run your business with ease.
With this in mind, let us teach you how to properly pay yourself as a business owner to avoid issues that could cause you financial distress.
3 Steps to Paying Yourself as a Small Business Owner
Step 1: After your monthly bookkeeping is complete, run your Profit & Loss Report to determine your profit for the month.
*This step is important for having total accuracy in what your business made and spent in the month in order to determine both tax savings and your payout amount based on your total profit.
Step 2: Transfer 25-30% of your profit (income minus expenses) to your tax savings account.
*A tax savings account is recommended for all business owners to store funds in or pay tax installments with. By regularly contributing to a tax savings account each month, you avoid having to scramble for the funds to pay your business taxes come tax season.
If you’re wondering how much you can expect to pay in taxes, talk with a certified accountant who is familiar with tax laws for your specific tax bracket and business type.
Step 3: Of what is left from your profit minus tax savings, determine what percentage you want to pay yourself based on upcoming business expenses, savings goals, personal need, or all of the above.
We recommend a 50% business owner payout from the remaining profit as it nicely leaves funds to go towards future, potential, or growth-related expenses. This decision is up to each business owner, but we are happy to give our recommendations to best set your business up for success.
Business Owner Payout Example
PROFIT: $12,488
minus
25% Tax Savings: $3,122
equals
Remaining: $9,366
Owners pay percentage: 50%
Owners pay for the month: $4,683
Important Considerations for Paying Yourself
The information above is a starting place and not a hard and fast rule. Adjustments can and should be made at any time.
We recommend taking into consideration what expenses you have coming up, both business and personal, when paying yourself. If you have large business expenses coming up, such as an annual licensing fee, equipment your business needs, or a conference to attend, you could adjust the owners pay percentage down. If you have upcoming personal expenses, you could pay yourself a higher percentage to account for that financial need.
The most important consideration to make when paying yourself is to understand the tax liability of your payouts. Since this is considered income, if you pay yourself an amount that changes your tax bracket, this could result in a significantly higher tax payment. Discuss this situation with your accountant as needed.
Taking Care of Yourself
Above all, we understand that as the business owner, you are entitled to your business profits as you see fit. We ultimately hope to be able to guide you in making the best decision possible for your business growth, longevity, and overall success. Reach out to us should you have any questions!
Have you seen our other helpful posts? Check them out here!
- Can I Buy Gifts for My Clients?
- How to Know What Qualifies as a Business Meal Deduction
- Common Bookkeeping Mistakes and How to Avoid Them!
The content in this blog post is provided for general informational purposes only and should not be considered professional tax or legal advice. The author is not a Certified Public Accountant, and no assurances can be made regarding the outcomes or consequences of tax returns, IRS actions, or any financial decisions based on this information. Readers are strongly advised to consult with a qualified tax professional or legal advisor for personalized guidance specific to their individual circumstances. The author expressly disclaims any liability for decisions made based on the information presented in this blog post.
