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Paying Yourself a Wage from Business Earnings

By: Tracy Whitelaw - Updated: 16 Nov 2010 | comments*Discuss
Self Employed Salary Wage From Business

Many new business owners aren’t sure exactly what, if anything they should be paying themselves as a self employed salary. Knowing exactly what your wage should be can be difficult, especially if you are operating in the red for a certain period of time. Getting to grips with new business accounting for your collectible business can be a huge advantage to the long term growth and success of your business.

Pay Yourself Enough or Pay What You’re Worth

One of the main questions most new business owners have is whether they should be paying themselves a small monthly wage that is just enough to get by, or paying themselves what they’re actually worth. The reason most people decide to pay themselves a small monthly wage is that it minimises your overhead and thus decreases the amount of capital overall that is required to make your business a success. It can also be more beneficial for tax purposes to pay yourself a smaller wage. If you pay all your company’s potential profit out as salary, you’ll usually end up paying more tax than if you pay yourself a smaller salary and then pay dividends on your company profit.

This is of course dependent on whether you’re a Limited Company or a Sole Trader and a good accountant can advise you further on this. Primarily though, the reason many people take the small salary is for the tax benefits this provides. If you do decide to pay yourself what you’re worth, you should factor that into your original business plan as this will determine how much capital you need to get the financial aspects of the business up and running.

Determining Your Self Employed Salary

Once you’ve made the decision on how you’re going to pay yourself during the startup stage of your business, you need to work out exactly how much that is going to be. One of the most crucial aspects is looking at exactly what you need to get by and pay your living expenses. If you are happy to sacrifice for your business, do so, but otherwise, be realistic and factor it into your expenses sheet. Creating your own financial statement and checking to see if these expenses can be met by your business can be tough, but it’s essential. Once you have all the basics listed on your personal balance sheet, this will give you an indication of what you’ll need to pay yourself each month. If you want to pay yourself what you’re actually worth, then you should start off by writing down your current salary or hourly wage. This will be the minimum you want to make from your own business, and no doubt you’ll want to exceed that which is why you’re setting out on your own initially.

New Business Accounting and Good Accountants

One of the best investments you can make when you start your new business is to hire yourself a good accountant who is familiar with other situations like yours. As a self-employed individual, there are a variety of tax breaks that you may be eligible for and a good accountant will be able to work these out for you. As a self employed business owner, you’ll normally go through the entire tax year without making any payments for tax. This of course means that at the end of the year you’ll have to file your own taxes and this can be a difficult procedure for many which is why a good accountant is fundamental.

When you first become self employed, you must register for self-assessment with the Inland Revenue within three months and if you don’t you’ll be fined. At this point you don’t have to pay tax, but you will be registered in the system to be sent out a tax return form each April. Generally tax is based on profits from the previous tax year and to capitalise on tax breaks, you should keep records of everything you spend in relation to your business. Many expenses are tax deductible, so it’s worth seeking advice on what you can claim for. If you start to earn over 52,000GBP in any 12 month period, it’s advisable to register for VAT. This means that as a small business owner, you can claim back VAT on all goods you’ve purchased for business use – again this ties in well with salary and what you’re paying out in each year.

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