Working out how much to pay yourself as a business owner can be something of a puzzle, but this guide will help you figure out the best and most tax-efficient way to pay yourself.
How business owners pay themselves
There are a number of ways you can pay yourself, with each of them generally falling under one of three types. These self-payment types include:
Pay yourself a salary
You can ensure you have a regular income by paying yourself a salary as if you were an employee. If your circumstances require you to have a certain amount of income every month to meet all your needs, then this is probably the best option. Of course, the amount you choose to pay yourself as a salary should be realistic, but this doesn’t mean you should undervalue yourself either.
Conduct some research into the level of salary someone in your position in your industry usually earns and work from there.
Pay yourself via business drawings
Another option is to pay yourself from the profits or drawings generated by the business. As a sole trader, pretty much all the profits belong to you anyway, although there are some issues to be aware of. In such a situation, you have unlimited liability so your personal assets will be at risk if you fail to meet your tax responsibilities.
If you pay yourself as a member of a multi-member LLC by distributing the draw or profits earned during a financial year, then the tax burden is eased by the limited liability status of the company. In this instance, every partner should receive a percentage of the profits as agreed. Of course, all taxes must still be paid, but only the company’s assets are at risk.
Pay yourself as an independent contractor
Alternatively, you can also pay yourself as if you were an independent contractor for the LLC. This might be an especially interesting option for any business owners who have a particular set of skills required to run the business. In this case, you will need to pay your personal income taxes as a self-employed contractor.
Most tax-efficient way to pay yourself
When deciding how to pay yourself as a business owner, one of the biggest concerns will be making sure whichever way you choose is the most tax-efficient way to pay yourself. It is impossible to provide a one-size-fits-all solution here as tax rates and allowances can vary greatly depending on the type of business you are running and how it is legally structured.
However, there are some pointers worth keeping in mind when choosing how to best pay yourself. Here are some ways to make paying yourself as tax efficient as possible:
Balance salary with draw payments
Assign yourself a minimal salary, then pay the rest of your reasonable worth via draw or dividend payments. Dividends tend to be taxed significantly less than salaries so this could be one of the most tax-efficient ways to pay yourself. Do check the legalities with your tax office before choosing this option.
Salary with annual bonus
In certain circumstances, paying yourself a minimal salary but topping that up every year with an annual bonus can be another tax-efficient way to pay yourself. Research the amount of tax due on the bonus you plan on paying yourself and compare it to the tax you would have paid had you spread that bonus across your monthly salary payments. Usually, the salary with a bonus self-payment option works out more tax-efficient.
Payment with stock or stock options
Paying yourself in stock or stock options can also be very tax-efficient, especially if the company is doing well and continually growing.
We Can Help
If you’re interested in finding out more about the most tax-efficient way to pay yourself, or any other aspect of your business finances, then get in touch with our financial experts at GoCardless. Find out how GoCardless can help you with ad hoc payments or recurring payments.