Establishing your salary as a business owner
Although business owners and entrepreneurs get to decide on their own salary, determining the amount can be one of the hardest decisions to make. Striking the right balance between paying yourself too much or too little is an age-old conundrum that faces every business owner.
Importantly, owners shouldn’t make the mistake of paying themselves from the profits their business makes. Before paying yourself with the money coming into your business, owners need to take things like tax, payroll and fixed costs into account.
There is also no point paying yourself a little amount if it is going to cause financial problems at home. Personal financial issues are very stressful, and stressed owners often don’t make good business decisions. Owners need to pay themselves enough money to live comfortably without worrying.
Business owners need to make sure that they pay themselves regularly. Dipping into business funds at random times when you think you need to will appear suspicious to the ATO, and may lead to the office auditing your business. Setting up regular payments for yourself and your employees and sticking to them means owners don’t have to worry about taking out the occasional large lump sum.
How much an owner can afford to pay themselves can also be restricted by the legal structure of their business i.e. sole traders can pay themselves whatever amount and whenever they like, but other incorporated businesses usually have business owners on the payroll.
Ultimately, the salary business owners pay themselves depends on the success of their business. Owners who run businesses that bring in more money can afford to have a higher salary. Owners going through a tough time financially are in a different position. When in doubt, check with your accountant to find out what will work for you.