Should you earn a salary from your business?
When money is tight, the salary of the owner is frequently the last priority on the small business budget. However, as your business income becomes more stable, you will be able to pay yourself. Don't mix your personal income and expenses with those of your business.
The primary advantage of paying yourself a salary, just like an employee, is that you have a consistent income. If a certain amount of income is required to meet your needs, paying yourself as an employee is the best option. As a result, the salary you pay yourself must be reasonable. To determine your salary, conduct research on industry standards, the amount of work, and the location of your business. You may be tempted to work for free but remember that your time is valuable. Your household budget must cover daily living expenses as well as debt repayments such as mortgages. Don't forget to make insurance and retirement plans, which your employer may have handled before you went out on your own.
Most business owners accept only a small weekly or monthly salary, barely enough to cover basic living expenses. The remainder of the cash is retained in the business as a float to protect against a drop in revenue or an unexpected business expense. If a company's cash reserves grow, the owner may decide to take out additional 'bonus' payments. So, while there are no useful statistics on average business owner salary or income (after all, each business is unique), their regular pay tends to be conservatively low.
Try to leave enough cash in the business to cover the following expenses:
Expenses: Keep a formal list of what you owe and when it's due so you don't take too much money out of the business at the wrong time. Accountants say it's not a good idea for business owners to estimate their cash flow needs. Set aside some money for taxes as well.
Rainy day funds: Set aside some money to weather business disruptions. You could set aside enough money to cover your expenses for 30, 45, or 90 days, for example.
Reinvestment: Save some money for future developments and improvements. You'll want to buy new office supplies, try a new marketing strategy, or hire a consultant at some point.
The owner of a company can withdraw money from their company in a number of ways, each with its own set of tax implications. When dealing with all these number of ways, keep in mind that removing money from the company in the form of an expense reduces the company profit and thus reduces the company's tax - but increases yours.
You can choose to take lump sum payments from the company as and when you need them, rather than declaring an official salary. An accountant will typically refer to this as "Drawings.These amounts are typically allocated to your loan account in the business and thus have no effect on the company's profit. This means you are removing cash from the company but receiving no benefit from company income tax, but it also means you have not officially "earned" any income. Because these funds are in your loan account, they are owed to the company and are not legally yours.
An official salary, like Director's Fees, reduces your company's profit and, as a result, your company's income tax. A salary also raises your personal income, which raises your personal income tax. It is important to note that SARS taxes allowances and benefits as if they were salaries. So, if you think you can save money on your personal taxes by paying yourself a "Cellphone Allowance" or a "Travel Allowance," consider consulting with a tax expert before creating your payslip. However, an administrative advantage of this is that with an official salary, your company is now responsible for declaring your income and paying your taxes to SARS. Your company will register as an employer with SARS and will deduct taxes.
Director's Fees are similar to drawings in that no official salary is declared. The main distinction is that Director's Fees are declared as an expense in the business and are considered income for you. As a result, while this option has the advantage of lowering the company's income tax, it raises your own. Remember that it is your responsibility, not the company's, to declare this income to SARS and pay the applicable income tax. You will not receive an IRP5, and the company will not make PAYE payments on your behalf. Instead, you must register as a provisional taxpayer with SARS and ensure that you pay the correct amount of tax to them. If you choose this option, make sure you also make monthly income tax provisions; otherwise, it can be difficult to come up with the lump sum due to SARS every August and February.
It is okay if you find Tax and its implications intimidating or confusing; you are not alone! it is worthwhile to consider hiring a registered tax consultant or consulting with one regardless of which stage your business is in. Lastly, when funders, banks, or investors look at your company's bank statements and see purchases for takeaways, school fee payments, or regular cash withdrawals, they'll know the funds are being used for personal expenses, which is a red flag for poor financial management.
