Why Business Owners Should Pay Themselves First
It is not new to business owners to hear the concept of paying themselves. However, many small business owners prefer balancing their budget and business operating expenses, and employees' salaries first. In contrast, a study shows that over 50% of small business owners pay themselves first.
Why it's important to pay yourself first
1. Stress Reduction
In all forms of businesses, no matter the size of the company. Stress is always present. From market competition to the economic crisis, merchants deal with pressures of all kinds every day. Another research shows that small business owners, especially women, have a higher stress level during the pandemic.
Paying yourself as a business owner won't solve market problems. However, it can be a psychological reward to business owners. It's a great way to acknowledge the hard work rendered. Just like employees, everybody loves a paycheck. Starting a business is something to be celebrated, and paying yourself first gives value to your time, intelligence, and hard work.
It's also considered a great motivator. A tangible step that pushes you more challenging to make your business succeed. Also, a driving factor to be excited every day to work is reinvesting yourself in your industry.
2. Financial Clarity
One important reason you have to consider paying yourself first is to understand your business as a whole better. For example, allocating a budget for yourself means you get a holistic view of your expenses and a better idea of where to adjust. In addition, it helps you to formulate ideas to help your business succeed.
How to pay yourself as a business owner
1. By Salary- According to the IRS, Pay yourself withholding taxes just as you would pay your employees, and the salary must be "reasonable" compared to other professionals in your industry. A type of payment is also known as predictable business expenses.
2. By owner draw- You take cash from your business profits as needed. The amount depends on how much money you put into the company. If your business is earning, it can give you some financial flexibility.
According to PayScale, the average salary for a small business owner is around $61,000. No two businesses are the same, which determines how much to pay yourself. Consider these factors: net income, debt, tax, and reinvestment savings.
Net income-defines as the gross revenue minus all expenses, including employee wages.
Tax Savings-businesses should stash away 30 percent of their net income for tax Payments.
Debt-compute any outstanding debt and loans your business has.
Reinvesting savings–refers to savings that are considered as funds you want to invest back into the business for future improvement or expansion.
How do you determine the owners' target salary?
Both business owners and their accountants can use this simple formula.
Net income– (Taxes + dept + reinvestment) = Salary
Recognizing the investment of your time and yourself into the company is important. As it lays the foundation for a successful relationship between you as the business owner and your company. Furthermore, the key to successfully paying yourself depends on the number you can commit to pay yourself regularly.
