Best Ways to Pay Yourself as a Shopify Store Owner

As a small business owner, one of the most crucial decisions you’ll face is determining how to pay yourself. This process can be complex, involving various factors such as your business structure, tax implications, and financial health. In this comprehensive guide, we’ll explore the best practices for compensating yourself as a business owner, ensuring both personal financial stability and business growth.

Understanding Your Business Structure and Tax Implications

Before diving into the specifics of paying yourself, it’s essential to understand how your business structure affects your compensation options. Different business entities have distinct tax implications and requirements for owner compensation.

For sole proprietorships and single-member LLCs, the process is relatively straightforward. You can simply transfer money from your business account to your personal account as needed. However, it’s crucial to keep accurate records of these transfers for tax purposes. Remember that all profits from your business will be reported on your personal tax return, regardless of whether you’ve transferred the money to your personal account.

S Corporations, on the other hand, require a more structured approach. If you’ve elected S Corp status for your LLC or corporation, you’re required to pay yourself a “reasonable” salary through payroll. This means you’ll need to set up a payroll system, either by using payroll software or outsourcing to a payroll service provider. The advantage of an S Corp is that you can pay yourself a salary and then take additional distributions, which are not subject to self-employment taxes.

Regardless of your business structure, it’s crucial to consult with a certified public accountant (CPA) or tax professional. They can provide tailored advice based on your specific situation and help you navigate the complexities of business taxes and owner compensation.

Determining Your Compensation

Once you understand the requirements for your business structure, the next step is determining how much to pay yourself. This decision should balance your personal financial needs with the financial health of your business.

A common approach is to start with a modest salary that covers your basic living expenses. As your business grows and becomes more profitable, you can gradually increase your compensation. This strategy allows you to reinvest more money back into the business during its early stages, promoting growth and stability.

When setting your salary, consider what you would pay someone else to do your job. This “reasonable compensation” standard is particularly important for S Corp owners, as the IRS scrutinizes salaries that are suspiciously low in an attempt to avoid payroll taxes.

It’s also wise to consider your business’s cash flow when determining your pay. Some business owners prefer to pay themselves a percentage of the business’s profits rather than a fixed salary. This approach aligns your personal income with the company’s performance and can help ensure you’re not overextending the business financially.

Remember that your compensation isn’t limited to a regular salary. You might also consider periodic bonuses or distributions based on the company’s performance. This flexible approach can help you balance personal income with business reinvestment.

Implementing a Payment System

Once you’ve determined how much to pay yourself, you need to implement a system for actually transferring the money. For sole proprietors and single-member LLCs, this can be as simple as writing a check from your business account to your personal account or making a bank transfer.

If you’re running payroll for yourself as an S Corp owner, you’ll need a more formal system. Many small business owners use payroll software or services to handle this process. These tools can calculate the appropriate taxes, generate pay stubs, and even file payroll tax returns on your behalf.

Regardless of your method, consistency is key. Set up a regular payment schedule, whether it’s weekly, bi-weekly, or monthly. This helps with personal budgeting and makes it easier to track business expenses.

It’s also crucial to keep meticulous records of all payments to yourself. This includes not only regular salary payments but also any bonuses, distributions, or expense reimbursements. Good record-keeping will make tax time much easier and help protect you in case of an audit.

Planning for Taxes and Future Growth

As a business owner, you’re responsible for paying both income tax and self-employment tax on your earnings. Unlike traditional employees, taxes aren’t automatically withheld from your pay, so you need to plan ahead.

Many business owners find it helpful to set aside a portion of each payment for taxes. A common rule of thumb is to save 25-30% of your income for taxes, although the exact amount will depend on your tax bracket and specific situation.

Consider making quarterly estimated tax payments to avoid a large tax bill (and potential penalties) at the end of the year. Your CPA can help you determine the appropriate amount for these payments.

Finally, don’t forget about planning for the future. As a business owner, you’re responsible for your own retirement savings. Consider setting up a retirement plan such as a SEP IRA, SIMPLE IRA, or Solo 401(k). These plans offer tax advantages and can help ensure you’re prepared for the long term.

Paying yourself as a small business owner requires careful planning and consideration. By understanding your business structure, determining an appropriate compensation strategy, implementing a consistent payment system, and planning for taxes and future growth, you can ensure both personal financial stability and business success. Remember, as your business evolves, your compensation strategy may need to evolve too. Regularly review and adjust your approach with the help of trusted financial advisors to keep both you and your business thriving.