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Owning a business can be both exciting and daunting. It is often difficult to balance paying yourself enough and ensuring funds are being reinvested back into the business as a business owner. The amount you pay yourself and the appropriate manner in which you do it will depend on your business structure. Therefore, this article will take you through ways to pay yourself and how much you should pay yourself, depending on your business structure.

Ways to Pay Yourself

As a business owner, there are two main ways you might pay yourself. This includes paying yourself directly from your business’ funds or paying yourself a salary.

Sole Trader

If you are a sole trader, you will be withdrawing cash from your business to pay yourself. As a sole trader, you are the business, and the business is you. Therefore, any cash that you withdraw from the business and use for non-business purposes may have tax implications at the end of the year.

It is important you consider the tax implications for your business over the course of the financial year. Additionally, you must ensure that you have enough funds set aside to meet your tax obligations. Furthermore, it is a good idea to reinvest cash back into the business. This will help your business grow and prevent any issues with cash flow from arising.

Company

Paying yourself an annual salary is more common for company owners. An annual salary will be recorded in the business’ financial documents and you will pay personal income tax on your salary. You may also wish to supplement your salary with dividends paid by the company or even a bonus. 

It may be appealing to establish an incorporated company and pay yourself a salary. However, it is important to note that establishing a company is not always in your business’ best interests, due to the extra costs involved. Therefore, it is essential to speak to an accountant and determine what business structure will best suit your business’ financial interests.

What Should I Pay Myself?

When determining exactly how much you should pay yourself, you should consider a few key things. Four of these are outlined below.

1. Think of Your Business Needs

Considering the needs of your business will help you determine what you can reasonably afford to pay yourself. This includes considering the business expenses and any funds that your business will need for business development or improvement. You should establish a business plan that projects your business growth. By doing so, you can calculate how you will need to make your plan happen.

2. Consider Tax

Depending on your business structure, you will have access to different tax deductions. As a business owner, it is important that you consider these deductions and how they can help you save. For example, if you are a small business owner, you will be able to claim certain business expenses when you prepare your tax return. Knowing what your tax deductions will look like will help you adequately plan when tax time comes. This is because it will be easier to determine what you can afford to pay yourself. You should look to the Australian Taxation Office (ATO) website and talk to an accountant to assist you with this.

3. Remember Your Super

If you are a sole trader, you do not have to pay yourself superannuation. However, you must consider what it will mean for your future if you do not do this. 

If you own a company, however, your employees are legally entitled to superannuation payments. Therefore, factoring in superannuation payments when determining how much you can pay yourself is an important consideration.

4. Look at Market Rates

If you want to pay yourself a wage and are unsure about an appropriate amount, you should look at market rates. Recruitment agencies and job-seeking websites post annual reports about average earnings for specific occupations. This will help you understand what your time is worth and ensure you are not under- or over-paying yourself.

A general rule of thumb is that you should pay yourself as much as it would cost you to replace yourself. For instance, if you are a carpenter, consider paying yourself what you would pay any other carpenter to do the same job.

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Key Takeaways

Your business structure will largely dictate how much you pay yourself and the manner in which you do it. Two of the key ways you might pay yourself include:

  • withdrawing cash directly from your business to pay yourself; or
  • paying yourself a salary.

If you are a business owner and need assistance determining the best way to pay yourself, LegalVision’s experienced business lawyers can help. You can contact them on 1300 544 755 or by filling out the form on this page.

Frequently Asked Questions

How should I pay myself as a business owner?

As a business owner, there are two main ways you might pay yourself. Namely, you can pay yourself directly from your business funds or pay yourself a salary. The most suitable way to pay yourself will depend on your business structure.

How much should I pay myself as a business owner?

When determining exactly how much you should pay yourself, you should consider a few key things. This includes considering the needs of the business, potential tax deductions available, accounting for superannuation payments and looking at market rates.

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