Posted on 03/01/2023 11:59:47 AM PST by EBH
Many small business owners are reducing or completely forgoing their salaries to make sure they can cover their business expenses. As inflation continues to impact prices for virtually everything, this phenomenon has become staggeringly common ― it might even sound like your own experience.
According to a Forbes Advisor survey, about 64 percent of small business owners aren’t paying themselves a salary due to rising inflation. As inflation rates increase, many business owners are scrambling to cut costs, including their own salaries. By diverting this money away from their own payment, these business owners are instead covering operational expenses like payroll and supplier invoices.
“Clients are taking more time to pay, which means you have less assurance of when you’ll receive payment for an invoice,” said Paula Glynn, owner and founder of Click Academy. “Paying yourself is the first thing that is sacrificed.”
However, doing so masks the financial health of a business, which could have serious consequences if not rectified. According to a CB Insights survey of failed startup owners, 38 percent of respondents said a lack of capital was the main factor in their failure. Although owners can defer their own payments to keep the lights on, doing so for a long time could be covering up a potentially fatal lack of liquid capital. That means bolstering cash flow and securing cash reserves should be a top priority if a business owner finds themselves funding their business with their own paychecks.
(Excerpt) Read more at msn.com ...
I am confused... if you own it.. why would you have to “pay yourself a salary”? wouldn’t all the profits go to you either way?
The price of everything has nearly doubled in 2 years and they’re surprised people are now doing without?
wow..
Because certain businesses (corporations, mainly s corps) require you to pay owners salaries as they are not self employed..
Also try living on one paycheck at the start of jan. Until the end of the year
Very expensive hobby
ahhh I see, I didn’t know that was the case with S-corps. I just assumed if you own it entirely, you would get all the profits either way.
For instance
if your business nets $100,000 in profit and you pay yourself nothing... you would still make $100,000.
If your business net $100,000 in profit and you pay yourself $50,000 of that and get the other $50,000 in profit from being the owner... you would still make $100,000.
The only difference is you would pay social security and medicare taxes on the salary.
It depends on the structure of the business.
Subchapter S corporations have all profits flow directly to the ownership.
LLCs, other corporations and various other structures can make different rules on how they work.
Taxes.
Say I’m the CEO of an “S” corp.
I don’t take a salary,
However my corporation feeds and nurtures my employees,
namely me. I make sure that value is way below what you
have to pay in taxes. But I live like a king.
How did all Congress critters get so rich?
No, if you own your business as an s-corp, you have to pay yourself a reasonable salary. If you cannot do that, then you are losing money.
Business expenses for staff salaries and monthly operating expenses (rent, contractors, utilities, supplies) are prioritized to the top of the list, with a safety cushion for unexpected expenses and slow pay clients.
Lastly comes owner compensation.
In our case if we paid ourselves salaries that would have to be declared as income as we are already getting the maximum deduction on business losses.
Usually, paying yourself a “salry” reduces both your personal income taxes and the business taxes.
It allows you to be flexible and profits not taken as income can be tucked away in various ways than remain untaxed or taxed at a lower rate until retirement or whatever.
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