Your startup is now at a stage where there’s money in the bank and / or a regular income stream to start paying yourself. Brilliant! So just how do you go about paying yourself?
The different ways your startup can pay you depends on your business structure – a decision you made when you first began your startup. Paying yourself through a sole trader, partnership or company structure are discussed in this article:
As a sole trader, you can pay yourself via making drawings from your startup. This is because there is no distinction between you and your startup for tax purposes – you lodge the one tax return which includes a section in the tax return for sole trader income.
So that you have a regular stream of income for you to help take care of your own personal expenses – like food, rent etc, a good idea is to set-up a regular drawing from your business bank account to your personal account for your own spending money.
In working out the amount of the regular drawing you should consider things such as how much money does your business need in its bank account each month (a minimum bank balance), any big business expenses coming up and how much your own personal expenses are. The benefit of this is that you have money for yourself which helps with your own personal budget, and you know exactly how much you are taking out of the business for yourself.
The one thing to always remember though is that all taxable profit your sole trader business makes must be included in your own personal tax return as taxable income, even if you don’t withdraw the entire profit amount into your personal bank account. This means that you need to make sure that you set aside enough cash to be able to pay the tax on your personal tax return when it falls due. The personal tax rates for the current financial year (FY14) are:
|Taxable Income||Tax on income*|
|0 – $18,200||Nil|
|$18,201 – $37,000||19c for each $1 over $18,200|
|$37,001 – $80,000||$3,572 plus 32.5c for each $1 over $37,000|
|$80,001 – $180,000||$17,547 plus 37c for each $1 over $80,000|
|$180,001 and over||$54,547 plus 45c for each $1 over $180,000|
* These rates do not include the Medicare levy of 1.5%
If your structure is a partnership, you pay yourself similarly to the way of a sole trader. However, you must discuss this with your other partners and ensure that the way the funds are drawn are in line with the rights specified in your partnership agreement (as each partner has a right to the funds). Whilst you lodge a separate tax return for the partnership, the partnership does not pay any tax. The tax is paid in the personal tax returns for you and your partner(s) – each of you pay tax in your personal tax return on the share of the partnership profit that each of you receive.
Paying yourself starts to get a bit more tricky when you are a company structure.
Your company is treated as a separate entity to yourself (even though you may be the sole shareholder and director). As a result, the company lodges a separate tax return and pays tax if due, and you lodge your own personal tax return. Therefore, paying yourself is not as easy as simply drawing money from the company.
If the company will be paying you a wage, you are essentially an “employee” of the company. When paying yourself, you must ensure the relevant tax is withheld from your wage, compulsory superannuation contributions are paid and your annual payment summary is prepared (amongst other legal requirements). This is no different than if you were an employee of a company unrelated to you.
In addition, as a shareholder of the company you are able to take money out of the company through payment of a dividend. When it comes to paying a dividend, it is simply a distribution of profits and does not require superannuation to be paid. More information on paying dividends through a company structure can be found in an earlier article I wrote for Shoe String How can I take money out of my company.
It’s important to understand the implications of the different ways of paying yourself and the tax and legal requirements around the different structure your startup operates under. Have a chat to your accountant, and determine what works best for you and your startup.
Disclosure: This article is not intended to replace in any way professional accounting and legal advice.