In this article, we’ll tackle how to pay yourself from your business in Amazon FBA.
Starting a company can be challenging, but equally important is the task of facilitating its growth. One question that often arises is how to establish a system for paying oneself. Rest assured, in today’s article, we will go through all aspects of this topic and provide you with valuable insights on how to pay yourself from a limited company.
I want to clarify that I am not a qualified professional accountant. Therefore, I strongly advise you to seek proper professional accounting or financial advice supporting your business. While this guide can provide general information, it is crucial to consult with an accountant to make accurate calculations and ensure you receive the most reliable and beneficial guidance. Relying on professional expertise will help ensure you have access to accurate and valuable information for your business.
What is corporation tax?
Let’s discuss corporation tax and how it applies to your company’s profits. Corporation tax is the tax that you pay for the profits generated by your company. In the context of my Amazon business, let’s backtrack a little and understand the flow of income.
In my Amazon business, I generate sales on the platform, and these sales encompass all the transactions made. Amazon deducts its fees for the services provided, such as the selling fee for utilizing its website and the FBA fees associated with shipping the products to customers. After these deductions, I receive a cash payout known as the payment disbursement amount, which I can withdraw weekly.
From the payment disbursement amount, I need to subtract my cost of goods sold, which includes expenses for the stock I have sold. Additionally, I need to consider other costs like payroll expenses, office expenses, computer equipment, internet, telephone, and any other relevant expenses. Once I have deducted all these costs, the remaining amount represents my pre-tax profits, which are the profits before paying corporation tax.
And then what?
Corporation tax is the tax that I am required to pay to the government based on these pre-tax profits. In the UK, the current rate of corporation tax is 19%. This means that 19% of my profits go to the government as the tax on the earning generated by my business.
It’s important to note that tax regulations may vary in different jurisdictions, so it is advisable to consult with a qualified accountant or tax professional to ensure an accurate understanding and compliance with tax obligations in your specific region.
How to compute income tax?
Now, let’s discuss how to compute income tax, which refers to the money you receive as payment from your business, usually through payroll. It’s important to note that income tax does not include dividends or income from company shares.
The income tax rates increase progressively as you earn more. Basic rate taxpayers will pay a 20% tax on their income, while higher rate taxpayers will pay 40%. Additionally, individuals falling under the additional or highest rate category will face a 45% tax on their income. This calculation does not include the entire income you’ve earned, but only the amount exceeding the threshold.
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What is National Insurance?
Another important aspect to consider is National Insurance (NI), which is another tax paid by both employers and employees. Each party contributes different amounts, but the funds are pooled together in the government’s system. National Insurance contributions go towards state benefits, including pensions. It is crucial to make these contributions regularly, as they help build up your pension fund, which will provide financial support when you retire.
National Insurance has various levels, including the lower earnings limit, primary threshold, secondary threshold, and upper earnings limit. Let’s go through each of them:
1. Lower Earnings Limit
This is the minimum amount you need to contribute per month, week, or year to be eligible for state benefits. Paying this minimum ensures that you qualify for these benefits.
2. Primary Threshold
This is the point at which you start paying National Insurance contributions as an employee. Once your earnings exceed this threshold, you are required to contribute.
3. Secondary Threshold
As a business owner, you need to consider the secondary threshold, which is the amount your business pays to support National Insurance contributions on your behalf.
4. Upper Earning Limit
If your earnings surpass $50,000 per year, both you and your employer are subject to contributions at this level. Keep in mind that paying yourself a salary above $50,000 may not be the most tax-efficient approach, and alternative methods should be considered.
What are dividends?
Another method of paying yourself as a company director and shareholder is through dividends. Dividends are cash rewards or other forms of value that a company pays to its shareholders, including yourself as the business owner. These dividends are derived from the company’s net income after deducting corporation tax and can be sourced from the current year’s earnings or retained earnings from previous years.
As a general guide, you can structure your earnings as follows: Take a basic salary of $7,500, which is above the lower earnings limit of $6,240 to qualify for state benefits, but below the primary threshold of $9,500. Additionally, you can pay yourself $5,000 in dividend payments.
How to pay yourself from your business
To effectively pay yourself while maximizing your tax efficiency, consider the following approach:
How to pay yourself from your business
Keep your salary within the lower earnings limit and the primary threshold for National Insurance. This ensures you qualify for state benefits and minimize National Insurance contributions.
Allocate the remaining income as dividends to yourself. However, it is important to ensure that your total dividend income stays below the threshold to benefit from tax efficiency.
By adhering to this strategy, you can pay yourself the maximum amount of tax-free money from your business to support your personal finances. Avoid the temptation to pay yourself a salary from your business, as this can lead to double National Insurance liability.
Let’s explore an example to illustrate this approach. Assuming you have $35,000 to align with the primary threshold.
- Salary: Set your salary within the recommended range, to align with the primary threshold.
- Dividend Payment: Allocate the remaining $25,000 as dividends. Ensure that your total dividend income, including any other dividend income you may receive, does not exceed to take advantage.
Best way to pay yourself
Determining the most tax-efficient method to pay yourself requires careful calculations. Although it can be complex, let’s break it down step by step to ensure clarity. Keep in mind that you still need to seek professional advice from an accountant, as individual circumstances may vary.
Again, let’s assume you have $35,000 in your business. First, consider your personal allowance, which is $8,784. We aim to withdraw the remaining funds in the most advantageous way.
1. Subtract Personal Allowance: Deduct the personal allowance from the total ($35,000 – $8,784 = $26,216)
2. Account for Corporation Tax: Apply the corporation tax rate, assuming it’s 19% to the remaining amount ($26,216 x 19% = $4,981.04)
Now, subtract this tax amount from the total ($26,216 – $4,981.04 = $21,234.96)
Let’s address the tax-free dividend allowance and personal tax-free allowance.
3. Tax-Free Dividend Allowance: Consider the tax-free dividend allowance. In this case, we assume it's $2,000. We want to utilize this allowance efficiently.
a.) Calculate the difference between the National Insurance (NI) threshold already paid and the NI primary threshold. Again, let’s assume NI is $8,784 and the NI primary threshold is $9,500, which will amount to $716.
b.) Allocate this remaining amount as dividends, which equates to $3,716.
c.) Add this to the previously mentioned tax-free dividend allowance ($2,000 + $3,716 = $5,716).
4. Subtract Taxable Dividends: Deduct the taxable dividends ($5,716) from the remaining post-corporation tax amount ($21,234.96 – $5,716 = $15,518.96)
Finally, let’s calculate the overall income and tax implications:
5. Tax on Dividends: Determine the personal tax on the dividends received. The specific amount will depend on your tax rate. For the sake of this example, let’s assume $1,163.92 in tax.
6. Net Income After Tax: Subtract the dividend tax ($1,163.92) from the total dividends ($15,518.96) to arrive at $14,355.04.
7. Add Pre-existing Earnings: Include the personal tax-free allowance ($14,500) to the net income after tax ($14,355.04) to calculate the overall income after tax ($14,500 + $14,355.04 = $28,855.04).
Therefore, in this scenario, you can take home $28,855.04 after tax from the initial $35,000. Please note that this is a complex calculation, again, is crucial for a professional accountant who can provide accurate advice.
Ready to pay yourself?
What we discussed is a lot of information to take. You can reread or watch our YouTube video that discussed this topic. For the last time, I hope you understand why I always say that it is better to check with a professional accountant because there’s so much to absorb that can cause confusion.
If you’re interested in my journey and want to know how much profit I make in one week, click the link to discover. Or you can also know how long did it takes to reach my 1M result in 1 year.