How to Pay Yourself as a Small Business Owner

February 20, 2024
5
minutes to read
by
Ben Mensah
Contents

Are you a small business owner puzzled by how to pay yourself? Whether you're a sole trader or the director of a burgeoning company, figuring out how to pay yourself can be a matrix of tax obligations, financial planning, and administrative hurdles. This guide is here to simplify the process for you. We'll explore the various payment methods, from salaries to dividends, and introduce you to Thriday, a next-generation financial management platform designed to simplify this intricate process for Australian small business owners. With Thriday, you'll gain the insights and tools you need to make informed decisions about your compensation. Let's dive in!

How to Pay Yourself as a Sole Trader

Sole traders and partnerships can pay themselves by simply taking money from the business. These withdrawals are considered part of the business profits and are subject to personal income taxation at the year's end. 

To prepare for tax obligations, it's advisable to allocate a portion of your income into a distinct bank account throughout the year, ensuring you have sufficient funds to cover the tax bill when it comes due – using software like Thriday, where you can manage up to 9 business transaction accounts* in the same user-friendly platform with automated accounting and real-time tax estimation can help make funds segregation and management a breeze.

Learn more about how to pay yourself as a sole trader here.

How to Pay Yourself from Your Company's Earnings

Navigating how to pay yourself from your company involves considering a few key aspects related to your business type. But don't sweat the small stuff - the general idea of drawing a salary is pretty consistent across various business structures.

Let's dive into the five main ways you might choose to pay yourself as the sole director of a company:

Paying Yourself a Salary or Wage

Potentially the most straightforward of your options, directors operating a company often opt to pay themselves a salary. This might be your best bet if you're the sole director and want a steady income. 

To pay yourself a salary, you will need to set yourself up as an employee and ensure your company is registered for Pay As You Go (PAYG) withholding with the Australian Taxation Office (ATO) so that you can withhold the required income tax from your salary.

A salary - the regular payment landing in your account each week, fortnight or month, works the same for you as it does for any of your employees. This salary is recorded as an expense in the company's financial records, and the owner is then subject to personal income tax on it.

With Thriday's Automated Accounting, managing your salary payments becomes a breeze. The platform seamlessly combines banking* and accounting to automatically categorise and store any incoming and outgoing expenses, including salaries, factoring them into automatically generated and continuously updated key financial reports. Learn more about the power of Automated Accounting with Thriday here.

Thriday's built-in Automated Accounting features categorise transactions, including salary expenses, to create financial reports and help you easily manage your business finances

Dividends

If your company had profits for the financial year that were subject to corporation tax, a proportion (or all of those if you wish!) can be paid out to shareholders via a dividend. Dividends represent a way to distribute the financial year's profits among shareholders and are an alternate way to pay yourself as a company director.

Your company can declare a dividend and pay it to you, and then, as a shareholder, you declare the dividend received as income on your personal tax return. Much like how franked dividends work with shares from other companies (think CBA or BHP), adjustments are made to account for the tax already paid at the company level to ensure you're not paying tax twice!

Repaying your Shareholder/Director Loan

When you initially launched your business, it is likely that you personally covered some expenses or provided financial support, either as a director or a shareholder. These funds can be reimbursed to you at any point without incurring tax liabilities for you or the company. Just make sure to document the amounts loaned and any subsequent repayments.

Loan from the Company

You can also draw out more than you lent as a way to pay yourself by treating it as borrowing from your company. This scenario requires formalising a loan with an agreement and interest payable to the company by you, the shareholder. Without a loan agreement and interest charge by the fiscal year-end, loans are treated as unfranked dividends to shareholders, with tax payable at each shareholder's marginal rate.

Bonus/Directors Fee

Another viable option for compensating yourself is through a bonus or a director's fee. This is particularly useful if you want to reward yourself for the company's performance over a specific period or for achieving certain milestones. 

To go this route, the company would need to formally declare the bonus or director's fee, which would then be recorded as an expense in the company's financial statements. Much like a salary, this form of payment is subject to personal income tax and requires that your company be registered for Pay As You Go (PAYG) withholding with the Australian Taxation Office (ATO).

This method offers flexibility, allowing you to adjust your compensation based on the company's financial health, and can be a strategic way to manage both personal and corporate tax liabilities.

Navigating Owner Compensation: The Thriday Difference

Regardless of how you opt to pay yourself, Thriday is here as a comprehensive all-in-one financial management platform developed to simplify the complex for small business owners in Australia.

Whether you're drawing a salary, declaring dividends, repaying a director loan, or even giving yourself a bonus, Thriday's seamless banking* integration and Automated Accounting ensure that all your transactions are recorded, categorised and securely stored. 

Thriday works to simplify your bookkeeping and provide you with real-time financial insights in the form of core financial reports, allowing you to make informed decisions about your compensation strategy. Find out more about how to easily transact with Thriday's business banking* here.

Get started with Thriday today to eliminate financial admin, reclaim your time and get back to focusing on running your business!

Thriday all-in-one platform
Use Thriday's powerful all-in-one platform to simplify and upgrade your business' financial management

Determining your Compensation

After figuring out how to compensate yourself as a business owner, the next step is deciding the amount. This figure should be a balanced consideration of both your personal financial needs and the operational requirements of your business.

A lot of Thriday members use the Profit First method.

Business Financial Requirements

It's crucial to ensure the business maintains sufficient funds for the following:

Operating Costs

Maintain a detailed record of your financial obligations and their due dates to avoid withdrawing excessive amounts from the business at inopportune times. Financial experts caution against estimating your cash flow needs loosely. Also, remember to set aside funds for tax obligations

Thriday's tax forecasting and real-time cash flow statements can provide a holistic view of your business's financial health, enabling you to make data-driven decisions about your compensation rather than just freely dipping into revenue as it comes and goes.

Thriday tax summary
Along with your income and cash flow statements, balance sheet and more - Thriday uses AI to continuously track your estimated tax position for the financial year so that you're never surprised come tax time

Emergency Reserves

Allocate some funds to cushion against unexpected business and cash flow disruptions. For instance, you might want to have enough to cover 30, 45, or 90 days' worth of operating costs – or potentially even longer if you operate in a high variance or seasonal industry. 

With up to 9 business banking accounts* available and manageable in a single user-friendly platform, Thriday allows you to easily separate funds for different needs, such as operating costs and emergency reserves.

Easily separate funds for different purposes with up to 9 integrated business bank accounts* in Thriday

Personal Financial Needs

Your personal budget should account for daily living expenses and debt obligations, such as mortgage payments. Additionally, you may want to plan for insurance and contributions to superannuation for a retirement nest egg - which your employer may have previously managed before you fearlessly ventured into business.

Striking a balance is the name of the game and both your personal and business budgets will have areas that are open to negotiation. Be ready for some compromises, particularly if you are still in the initial stages of your business.

Common Compensation Practices for Business Owners 

Many business owners opt for a minimal regular salary, sufficient only to cover their household's day-to-day expenses. The remaining funds are usually kept within the business as a financial cushion for periods of reduced income or unforeseen expenditures. If the business accrues a surplus in its cash reserves, you can always occasionally withdraw additional 'bonus' payments when the sun is shining.

Each business and industry is unique - making it hard to provide meaningful statistics on the average income or salary of business owners. However, it's common practice for owners to maintain a relatively modest regular income.

With Thriday's automatically generated tax forecasts, cash flow statements, and key financial reports, you can easily discern an appropriate compensation as director. 

Thriday automatically provides a continuously updated and comprehensive view of your business's financial health, helping you determine an appropriate compensation level that balances your personal needs and your business's operational requirements. 

With Thriday, you can confidently navigate the complexities of business owner compensation backed by real-time financial insights.

Thriday: Simplifying Compensation Management for Business Owners

As we've explored the various ways to pay yourself as the director of a company owner, it's evident that the process can quickly become intricate and administratively complex. This is where Thriday comes into play, offering a streamlined solution specifically designed for Australian small business owners.

The Thriday Advantage in Compensation Management

Whether you're drawing a salary, declaring dividends, or even giving yourself a bonus, Thriday's integrated banking* and Automated Accounting features make it easier than ever to manage your compensation. With automatically reconciled transactions, real-time tax forecasts, cash flow statements, and critical financial reports - Thriday provides the insights to make informed decisions about how much to pay yourself in the context of your business's financial health. 

And with all your financial data harmoniously brought together in one simple-to-use platform, Thriday uses the power of AI to easily categorise your transactions to automate the preparation of the necessary financial reports to make tax time, relax time – no matter how you choose to pay yourself.

Optimise Your Compensation Choices with Thriday

Thriday eliminates the guesswork from financial management, allowing you to concentrate on your business while confidently navigating the complexities of owner compensation. 

Discover how Thriday can simplify your approach to paying yourself and eliminate financial admin today.

Why waste time on financial admin when Thriday can do it for you?

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