Running a successful trade business requires a lot of juggling. You’re the estimator, the project manager, the crew leader, and sometimes even the cleanup person. However, one of the most important hats you wear is that of a business owner, and that comes with a crucial question: How do you pay yourself?
This might seem like a simple question, but for trade business owners, it can be surprisingly complex. Unlike salaried employees, your income isn’t a fixed amount every paycheck. It can fluctuate depending on the size and number of projects you take on. So, what’s the best way to structure your own compensation?
Understanding Your Options
There are two main ways to pay yourself as a trade business owner:
- Salary: This approach treats yourself like a regular employee and issues yourself a regular paycheck. The benefit of a salary is consistency – you know exactly how much money you’ll have coming in each pay period, which can be helpful for budgeting and financial planning. However, this method doesn’t reflect the ups and downs of your business income. If you have a slow month, you might end up paying yourself more than the business earns.
- Owner’s Draw: This method allows you to withdraw money from the business as needed. It provides more flexibility as your income directly reflects the profitability of your projects. However, it can also make budgeting more challenging, and the IRS has specific rules regarding owner’s draws.
Choosing the Right Method for You
The best way to pay yourself depends on several factors, including:
- The size and stability of your business: If you have a well-established business with a consistent income, a salary might be a good option. However, if your income is more variable, an owner’s draw might be more suitable.
- Your personal financial needs: Do you need a steady, predictable income stream? Or are you comfortable with some fluctuations?
- Tax implications: Both salaries and owner’s draws have tax implications. Consulting with a tax advisor can help you understand which method is more tax-efficient for your situation.
Complete Payroll Solutions
While both salary and owner’s draws have their merits, we at Level Accounting recommend considering a more comprehensive approach: complete payroll solutions. This method combines the benefits of a salary with the flexibility of an owner’s draw while ensuring you comply with all tax regulations.
Here’s how it works:
- You set yourself a desired salary based on your needs and business projections.
- Throughout the month, you track your business income and expenses.
- At the end of the month, you calculate your net profit (income minus expenses).
- If your net profit is sufficient to cover your desired salary, you pay yourself that amount as a payroll check. This ensures you receive a consistent income and simplifies budgeting.
- If your net profit is lower than your desired salary, you can supplement your income with an owner’s draw. However, the amount of the draw should be reasonable and documented properly.
- Conversely, if your net profit is higher than your desired salary, the excess remains in the business account. This can be used for reinvestment, future expenses, or even a bonus for yourself later.
Benefits of Complete Payroll Solutions
There are several advantages to using payroll service solutions for paying yourself as a trade business owner:
- Consistency and Stability: You receive a regular paycheck, providing predictable income for budgeting and financial planning.
- Flexibility: You can supplement your income with owner’s draws during slower months.
- Tax Advantages: Payroll taxes can be a significant expense, and paying yourself a salary allows you to take advantage of payroll tax deductions.
- Compliance: Complete payroll solutions help ensure you comply with all IRS regulations regarding owner compensation.
Additional Considerations
While complete payroll solutions offer a great way to pay yourself, there are a few additional things to keep in mind:
- Recordkeeping: It’s crucial to maintain accurate records of your business income, expenses, payroll taxes, and owner’s draws. This will be essential for tax filing and financial analysis.
- Tax Planning: Consulting with a tax advisor can help you optimize your payroll strategy to minimize your tax burden.
Level Accounting Can Help with Your Payroll
Deciding how to pay yourself as a trade business owner is an important decision that impacts your finances and taxes. By understanding the different options available and the benefits of complete payroll solutions, you can choose a method that provides consistency, flexibility, and compliance.
At Level Accounting, we specialize in helping trade business owners navigate the complexities of financial management. We can assist you with setting up a complete payroll system, ensuring accurate recordkeeping, and developing tax-saving strategies.
Contact us today to schedule a consultation and learn how we can help you take control of your financial situation.
