One thing that I hear a lot from clients is that they don’t really know how to separate their business accounts from their personal accounts. This can make end of the year accounting a pain, not just for your accountant but for your business too.
As a New Year’s resolution you should consider paying yourself a salary if you’re self employed. I know this may sound a little bit weird since the money comes into a business that you own, so it makes sense to just use the money of the business to cover any expenses, right? Well the problem with that is that the IRS does not really see it that way. A business and an individual are two separate entities, this of course depends on how your business is setup but most businesses including LLC’s will benefit from keeping separate finances.
What you may not realize is that this will make it easier for you to track profit and loss. For example, if you’re paying yourself a consistent salary, then you’ll know exactly how much of a profit is left every month from the incoming transactions that a business has. There are many benefits from doing this but a lot of small business owners don’t realize that they should and probably have to do this to run a more efficient business.
On the flip side, if you pay yourself a salary you know how much money you can spend every month and budget accordingly. Business owners face the additional challenges of not having a steady paycheck, this can be especially difficult for those who have grown accustomed to having a job working for someone else. Knowing how much money you are paying your employees from a business stand point is important, and you should consider yourself an employee of your company.
Setting up a salary for yourself should not be so difficult, just look at your bank statements from previous months and approximate how much net income you’ve accrued constantly every month. Make sure to leave some buffer for unexpected expenses but at the same time make sure you’re being compensated fairly to avoid dipping back into the business account.
This New Year, make a resolution of being a better business by avoiding a whole year of accounting regrets, you'll be glad you did come tax season.
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