Having enough money to pay yourself is crucial for your small business to thrive. But determining how much you should take home can be challenging, especially if you’re a new business owner.
Several factors to consider when deciding how to pay yourself, such as your business structure and the earnings your company generates. Learn how do small business owners pay themselves.
Separate Your Personal and Business Finances
One of the most important aspects of running your own business is keeping your personal and business finances separate. This is critical for tax purposes and protecting your financial health.
Keeping your personal and business finances separate can lead to tax problems, unpaid interest claims, and even penalties from the IRS. However, you can take some simple steps to ensure your finances stay on track and in good shape.
- Establish an EIN (Employer Identification Number). Getting an EIN is free and takes only a few minutes, and it can be used to conduct business expenses and open a bank account in your company’s name.
- Separate Receipts
Many small business owners are guilty of mixing their personal and business expenses. Creating separate folders for business receipts and your ones can help you keep track of your purchases.
3. Maintain a Separate Banking Relationship
Choosing the right banking professional is essential to ensure your finances stay in good shape. A professional can help you determine the type of bank account you need and provide financial guidance and support to grow your business.
4.Avoid Commingling Your Funds and Assets
Regardless of how well-established your business is, mingling your funds and assets can be dangerous for your financial health. Taking the time to separate your finances can be difficult, but it pays off in the long run.
Set Up a Business Bank Account
Small business owners should set up separate bank accounts for their businesses. Having one bank account dedicated to your business can help you manage your finances, streamline payment processing and simplify tax filing.
A business bank account can also help you establish your business credit, which will be helpful if you need to apply for a small-business loan or work with a supplier on credit. When opening a business account, choosing a bank with FDIC insurance is essential.
The best way to find the right bank is to compare accounts and fees from several banks. Each bank offers something different, so take your time to find the best suits your business.
In addition to a checking account, many small businesses also use savings accounts. These are accounts where you put money aside for taxes or big purchases. They usually pay interest on the funds in the report.
Some small businesses may need a merchant services account, which allows you to accept debit and credit card payments. These accounts are typically unavailable with a traditional personal bank account.
Before you can begin the process of opening a business bank account, you will need to provide certain documents and information. These requirements vary depending on how your business is organized, but most companies will need a federal EIN and some personal identification.
Apply for a Credit Card for Your Business
Credit cards are an easy and convenient way to pay for business expenses and can also help you build your company’s credit score. There are various credit card options for small businesses, including cash back and travel rewards credit cards.
While business credit card applications aren’t similar to applying for personal cards, you will often need to provide more information about your company. This includes your business name, tax identification number (EIN), annual revenue and other details.
If you’re a freelancer or have a sole proprietorship, you can use your Social Security number instead of an EIN to get a business credit card. However, you’ll need to include your EIN in your application because the credit card company will need to verify that you are a business.
Aside from your personal credit history, you must show that your business has a stable income, preferably over $2,000 per month. This will be especially important if you’re starting your business.
Most business credit card issuers will check your credit scores and business credit reports to make sure you’re a reasonable risk for them. They may make a “hard inquiry” on your credit, which can temporarily lower your credit score.
Generally, you can use your business credit cards for business purchases only, and you’ll usually have to pay interest on your spending. Some cards offer 0% introductory APR on new purchases and balance transfers for the first year or so.
Set Up a Payroll System
Small business owners should set up a payroll system to ensure they pay their employees on time and comply with tax laws. Payroll consists of many calculations, and miscalculations can lead to costly business penalties.
A payroll system can help you automate the process, which saves you time and prevents errors. It also makes it easier for you to track employee hours and submit expenses.
In addition, some systems are also integrated with accounting and time-tracking software, making the whole process even more accessible. These integrations can help you track how much you’re paying your employees and when, and they can also integrate with HR and benefits management software.
Many payroll software solutions offer automated tax filing, so you can avoid wasting time and energy manually preparing and filing taxes. It’s also important to remember that various systems are on the market, so you must consider your specific needs and budget before choosing a solution.
Good payroll software will have all the tools you need to run your business efficiently and effectively. It’ll also automatically deposit wages into your employees’ bank accounts, calculate payroll taxes, and keep records of paid time off. It’ll also help you set up your payroll calendar, determining the day and frequency at which your employees get paid.