You may think that being your own boss is not a big deal, but it is actually because it has its difficulties. To run your personal affairs, you might have to generate money, but the business might need money as well. It is in fact a difficult decision to decide how much income to take from the entrepreneur business rather than what your business deserves.
However, as a result of your efforts, you receive a salary when you work for someone else. This is a pretty straightforward process. Therefore, when you own your own business, sometimes you forget that you should pay yourself for your own brand. The tips below can help you make the income you need without draining the budget of your business.
In response to this issue, the certified financial planner David Morganstern from CMC Advisors in Portland says: “It is imperative that the business owner know their income revenue cycle, payables, and receivables. A critical issue to understand is cash flow, which is the lifeblood of any small business”.
What are the most important things you need to know if you plan on paying yourself as an entrepreneur? Having a decent entrepreneur salary is very important so that you will not have to sacrifice your own health to achieve your own dreams.
Entrepreneur business is complicated
When you are a small entrepreneur business owner you are keen to take a salary, which is different from being satisfied with the amount remaining in the till after paying for all your expenses. There is a possibility that having a fixed entrepreneur salary, while it may seem to be attractive, may not be realistic since all entrepreneur businesses face a mixed bag of financial health that varies from year to year.
If you should consider anything, it should not be the business you intend to run, but rather what you need to survive your daily life. You need to decide how much you must spend on mortgage, food, utilities, and other expenses so that you can come up with a suitable amount. The problem is, however, that entrepreneur business profits are unlikely to be as stable as your personal money requirements, so being flexible is important to ensure success.
To ensure against undue stress on the entrepreneur business, lifestyle overheads should not exceed a reasonable total. The business may be able to maintain operating capital if personal expenses are kept low so that there will be more cash to put towards future anticipated cash flow. But, what about your entrepreneur salary?
You then need to examine the budget, income, and cash flow requirements for your entrepreneur business.
Take a look at these points:
- Does the business generate a profit?
- How does a business need to manage its cash flow?
- Is the business prepared to weather revenue downturns with an emergency funding source?
You have to keep in mind that an owner must decide how much they can reasonably take on salary, based upon the amount of revenue and expenses. You may be able to make up the difference between a lower entrepreneur salary and a bonus if your entrepreneur business is struggling financially and you are making a less than average salary. Here is a video about the importance of always paying yourself in the first place:
The onset of expansion of your business, or the start-up phase, will put you in a position to neglect your salary for the sake of reinvesting every dollar into the company. There are, however, dangers involved as well. There is the possibility that you may damage your personal credit and lose access to loans in the future. You may also end up attracting attention from the IRS if you do this.
Certainly, the IRS
Losing money every year and not paying taxes could make your business suspicious to the IRS.
The IRS can close down, fine the business owner, or take legal action to cease business operations if these activities appear to be a hobby without any intention of turning into an entrepreneur business. In this situation, it's not unusual for someone to go for three out of five years without taking any entrepreneur salary.
In this case, it appears the business is only a hobby, and not a legit business, as the name would suggest.
This is why the IRS will likely be more inclined to audit this return and inspect the business for its legitimacy under such circumstances. Businesses know that there are a lot of options regarding what they pay when it comes to taxation.
They know this already. An IRS tax audit will probably not find any violations of the law if you are taking a small entrepreneur salary or none at all so that profits can be kept in the business for expansion and growth.
In contrast, the IRS may take stronger action if the business was clearly intended to finance a lifestyle rather than make a profit and made no effort to sell a product or service.
Throughout his presentation, accountant Smith describes a particular business owned by three people, where the owners attempted to structure their compensation to avoid FICA taxes. Throughout the year, the owners received more than $600,000. They paid themselves $80,000 in salary, but in total, they took home nearly $600,000.
Dividends were paid out in the amount of $520,000, therefore the FICA tax was not applied. As a result of this particular situation, the IRS was not pleased.
Other risks of skipping your entrepreneur salary
If you sacrifice your personal finances for the benefit of the business, it may suffer in the long run. Your entrepreneur business is "your baby," and as its creator, you've put a lot of heart into this venture.
A business that doesn't pay your bills and allows you to live on a lower standard of living can cause you to turn against the company. It is not just your motivation to work that will change if your attitude changes. Your customers may also notice a change. They might fear that your entrepreneur business will fail if they think your business is marginal. If that occurs, they may leave your business and go somewhere else.
Your ability to save for retirement can also be adversely affected by skipping a salary. Your earnings are accounted for when you contribute to a small-business retirement plan. If you take a small salary, your retirement contributions would be small, and if you take no salary, your retirement contributions would be nonexistent.
As you approach retirement, you may be compromised in terms of your health. Several factors influence your health as you approach retirement. For businesses that are pass-through entities (partnership, or sole proprietorship), defined contribution plans may allow contributions from the owners as long as the entrepreneur business makes money, regardless of whether the owner takes a significant entrepreneur salary. Profits generated by the business are considered the owner's income, regardless of whether the owner takes an entrepreneur salary.
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