Why would you want to be a small biz owner? Simple.
You get paid every-single-day! Most importantly you can pay yourself 4 ways. When you are working for “the Man” you rarely utter these words “I love Mondays”! As a small business owner, I truly love Mondays, because I can check my bank account and see what gross deposits hit my account. Sure, it’s not all profit. When as a business owner and you start seeing deposits in one day what it used to take you a full year’s salary. You will love Mondays too…
Ah, yes. The good ’old standard W2. Yes, even as a business owner you should be taking a salary week in – week out. Let the government wet their beak in the taxes taken out that you will never see again. My advice; It should be no less than your highest paid employee. Once you are established, this should range from a third to a half of what you are really taking out of the company.
2. Draw payment.
This is basically a check that you cut to yourself from the company checkbook, or taking cash out of the company. No taxes are taken out. No paperwork is required. Just a line item on your QuickBooks. Yes, you should be holding back and paying taxes on it. The truth is with deductions and so on from personal and business, this is probably not the case. Just don’t go crazy with it and leave your company without any cash on hand! Vegas can wait. My advice; 25% give or take of the total taken out.
3. The company paid expenses.
This is where it gets interesting. What happens when the company (legally) ends up paying your car payment, or your health insurance? It is not coming to you in cash but it is paying expenses not related to the company directly. What about those fancy restaurant dinners where you talked “business” with a “client”. Go ahead, do it. Just don’t take it for granted and lose track on what you are taking out. My advice; 25% give or take of the total taken out.
If you are incorporated you as an investor can take out dividends. Why is this important? Depending on your business and income to where you fall into the tax bracket. You might be falling into a Federal tax bracket of 22%-37%. Whereas qualified dividends, on the other hand, are taxed at the capital gains rates, which are lower. Anywhere from ZERO to 20%.
If you want to play the game, you have to learn the rules.
Welcome to the 1% club.