I’m watching in disbelief, like you, as I see the photos of the hurricane devastation keep rolling in. It’s hard to believe so much infrastructure can be swept away that quickly. Our hearts are grieving for those who lost loved ones and homes and businesses from Helene.

I’ll keep you updated on any deadline extensions that the IRS makes available in the coming days – they usually do in situations like these.

We’d all like to make deadlines go away in good times, much more so in hard times. You’ve never heard somebody say, “I love a good deadline.” They’re demanding (and often bring on anxiety).

But…as your accountant, I’m compelled to remind you about a big one coming up.

If your business taxes are still on extension, and we’re waiting on something to get yours finalized, October 15 is the submission deadline. Let’s get everything finalized and wrap 2023’s taxes up.

Because you’ve got to put your focus on some other aspects of your Chester NJ business, like payroll. It’s your employees’ favorite day of the week.

As a business owner, the former thrill of payday as an employee is often overwhelmed by the anxieties and pressures of payroll and your business’s expenses. Especially if you’re struggling to pay yourself.

It’s important to know, if you’re in that predicament, it’s not an uncommon thing. A lot of business owners struggle to pay themselves (or pay themselves enough). According to this study, most business owners pay themselves less than 100k annually, and roughly 30 percent of business owners don’t even take a salary.

But it doesn’t have to be that way. If you’re just starting out, business owner pay is a topic you’ll want to make sure you think strategically about so you aren’t just depending on the profits to take your cut.

Getting paid is just as important for you as it is for your employees. Here’s how you do it…

Ethan Hundley on How You as a Business Owner Pay Yourself

“Don’t be afraid to give up the good to go for the great.” -J.D. Rockefeller

You work hard as a business owner, probably harder than your employees, because this is your business. So, it only makes sense that you get paid for it.

But if you’re underpaying yourself in order to meet the demands of all your expenses and payroll, it’s not necessarily the best way to go. Although you avoid IRS entanglement (more on that later), you end up hurting yourself, which inevitably hurts your Northern NJ business. It’s a vicious cycle.

Mastering the delicate balancing act of business owner pay can be hard. But the good news is, figuring out how to pay yourself isn’t impossible. It doesn’t even have to be unenjoyable. You just need a grasp of which business owner pay method is right for you and a plan for executing it.

Let’s start with some business owner pay options that are often used:

Salary — With a salary, you receive the same amount with each paycheck, just like an employee. Your employment taxes are withheld automatically. It’s predictable and rigid.

If you have S-corp, C-corp, or LLC taxes as a corporation (and actively work for your business), you must take a salary.

Owner’s draw — This option is typically used by owners of sole proprietorships, partnerships, and LLCs which are not taxed as corporations because it provides flexibility. You simply take money from your business’s net profits by writing yourself a check or electronically withdrawing funds from your bank account.

Don’t forget: Self-employment taxes are not automatically withheld, so it’s up to you to budget for and pay them quarterly. A good rule of thumb is 30 percent of your net profits. This percentage varies depending on specific state taxes and your individual situation.

Dividend — Dividends are payments made to shareholders from a company’s profits. They’re generally taxed at a lower rate than regular income (and are in general pretty tax-efficient). Owners of C-corporations or those who own shares in a company can receive dividends in addition to their salary.

Profit sharing — With this option, business owners distribute a portion of the company’s profits to themselves and potentially their employees. This method can be highly motivating but requires detailed planning. Profit-sharing plans often involve formalized employee benefit plans, and how they are implemented will depend on your specific situation.

So, how do you choose? Well, there are two considerations:

1. Much of this will be decided by your business structure. Some structures are required to take a salary (see note above), but you can get a tax-friendly boost by tapping into dividends. For other structures, you can lean into an owner’s draw or profit-sharing option depending on what’s most beneficial for you.

2. Your cash flow will also be a deciding factor. Is your business brand new, or do you have a steady cash flow established? Are you in an ebb-and-flow financial situation? Or have you been seeing cash come in like clockwork for a while? A salary with added dividends lends to a solid financial foundation. An owner’s draw or profit-sharing setup is advisable if you’re still trying to find your footing.

Then comes the question of deciding how much you’ll pay yourself. Every business owner wants to know how to do this in a way that rewards your hard work but also doesn’t strain the business. It’s definitely a balance that can take time to land.

Here’s a checklist you can start with:

• Decide how much you need based on your personal budget. Write down the amount, then set it aside. 
• Determine what your business can afford. If you’re using an owner’s draw, look at your business’s net profit. If you’re using a salary, look at your annual gross revenue, then subtract your operating expenses. Divide that among the 52 weeks of the year to help you set a payroll schedule. 
• Look ahead and behind. Check your financial records from previous months and use those to project what your income will be a few months into the future. Think about upcoming taxes, occasional or annual expenses, expansion plans, and expected fluctuations.
• Consider possible legal obligations. This is where that “reasonable compensation” limit comes in: For certain business structures (usually S corporations), the IRS imposes a limit on how much business owners can pay themselves. Basically, this means a business owner’s pay must match what most business owners in the same industry are being paid. Business owners can face some nasty tax liabilities if they don’t comply (and trust us… it isn’t pretty). Be sure to double-check these requirements before your salary is set.

With business owner pay, your goals are simple: Keep your Northern NJ business healthy, your taxes in check, and your hard work rewarded as much as possible.

Don’t get too overwhelmed with the details. If you’re still scratching your head about how to pay yourself, let’s chat.

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Because you should get paid too (and well),

Ethan Hundley