Running your own business is empowering—but let’s be honest, one of the biggest questions entrepreneurs face is, “How do I pay myself?” Whether you’re running a service-based business, selling products, or building a subscription model, paying yourself requires careful planning to keep your business and personal finances in shape.
In this guide, we’ll walk you through the different ways to pay yourself, key tax implications, and how to strike the right balance between business growth and personal income.
Key Concepts of Paying Yourself
The Difference Between Salary, Dividends, and Owner’s Draw
There’s more than one way to pay yourself, and each method comes with different tax implications. Let’s break it down:
- Salary: A fixed amount you pay yourself as a “wage,” just like a regular employee.
- Dividends: Profit distributions paid to you as a shareholder (if your business is set up as a company).
- Owner’s Draw: Taking money directly from business profits, typically used by sole traders or partnerships.
Each approach has its pros and cons, and the right choice depends on your business structure and financial goals.
How Profits Impact Your Pay Structure
Your profit margin affects how much you can pay yourself. You want to pull enough to cover personal expenses but leave enough in the business to invest in growth and stay afloat during slower months. It’s all about balance.
Different Ways to Pay Yourself as an Entrepreneur
Paying Yourself a Salary
If your business is set up as a company, paying yourself a salary could be the best option. Not only does it provide stable income, but it also simplifies budgeting since you know exactly how much you’ll receive each month. On the flip side, salaries require regular payroll management, and you’ll need to factor in taxes like PAYG withholding.
Taking an Owner’s Draw
Sole traders and partnerships often choose owner’s draw as a way to pay themselves. With this method, you simply transfer profits from your business account to your personal account when needed. It’s flexible and easy to manage, but you’ll need to track your withdrawals carefully to avoid draining your business funds.
Using Dividends and Distributions
If you’ve structured your business as a company, you can pay yourself dividends—a share of the profits. This option can be tax-efficient, especially if you’re in a lower tax bracket. However, dividends are only available when the company is profitable, so this method may not be ideal in the early stages of your business.
Factors to Consider Before Deciding
Tax Implications of Each Method
Each payment method comes with different tax requirements. Salaries may attract income tax and superannuation obligations, while dividends are taxed differently (often at a lower rate). If you opt for an owner’s draw, you’ll still need to pay tax on business profits at the end of the financial year, so it’s crucial to set money aside.
Impact on Business Cash Flow and Growth
It’s tempting to pay yourself as much as possible—but cash flow management is critical. If you take too much from the business, you may struggle to cover business expenses during lean months. Aim to find a balance between paying yourself fairly and reinvesting in your business for future growth.
Tools to Manage Business Finances Efficiently
Managing your finances well ensures you’re paying yourself without compromising your business. Here are a few tools to consider:
- Accounting software like Xero or QuickBooks to track income and expenses
- Budgeting apps to plan both business and personal cash flow
- Financial advisors or bookkeepers who can guide you on tax-efficient payment strategies
Pro tip: Set aside a portion of your profits for tax obligations and unexpected expenses—it’s way easier than scrambling at the last minute.
Final Thoughts
Paying yourself from your business is all about balance and strategy. Whether you choose salary, owner’s draw, or dividends, make sure your payment method aligns with your business structure and financial goals. Managing your income wisely ensures that both you and your business can thrive. Always speak with an accountant and/or tax expert to ensure you select the best option for you and your business.
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This article is for general information purposes only and should be used solely as general guidance. It does not and is not intended to represent legal advice or other professional advice.
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