One of the reasons people start their own business is the prospect of financial freedom. It’s common practice for those running their own company to funnel some of their living expenses through the company and take less money as salary. And there are some circumstances where that can be advantageous. But there’s much to be said for keeping your personal and business expenses completely separate.
Failing to appreciate that company money isn’t your money can lead to unforeseen tax outcomes as well as give you an unclear picture as to what you are truly earning from the business and how the business is truly performing.
So, when it comes to the question of “how much do I pay myself?” here are the golden rules to follow:
- Pay yourself an amount that funds your lifestyle, particularly if you live somewhere with a high cost of living. This way, you’ll be less tempted to look to your business to help fund your personal expenses.
- Treat yourself like an employee and draw a ‘proper’ salary meaning it’s regular with PAYGW taken out and superannuation paid quarterly.
- Be aware that if you draw money out of the company, you’ll have to pay tax on it. Your company’s not a credit card you can use at will. There are consequences.
- Talk to your accountant early in the financial year, and make a plan for coming twelve months.
What’s the risk if you don’t follow the rules? A big, surprising, and unwelcome tax bill. Easily avoided, if you plan ahead.
If you’re looking for someone to help with your tax planning, get in touch today, we’d love to help.