How to Pay Yourself from Your Business

Entrepreneur, Financial Planning, Taxes

For most of us, the first dollar made is always special. Some of us even frame that dollar bill and hang it in a place of honor along with degrees, certifications and plaques. But for business owners, there’s often another milestone that gets forgotten: the first dollar you actually pay yourself from the business that you created. Paying yourself from your own business is an important step in setting up a healthy, functioning enterprise. After all, what’s the point in starting a venture that won’t ultimately benefit you? Unfortunately, many business owners don’t put much thought into that process – at the cost of their own misfortune. There are plenty of considerations to take on before you write yourself a check, and a few you probably wouldn’t think of. Here are some items to take into account as you reap the benefits and cash in on your hard work.

• Pay yourself based on last month’s earnings. Projecting your income is difficult for new business owners, who may still be finding clients and getting used to the market cycle of their industry. You can remedy that by basing this month’s salary on last month’s earnings. This way, you won’t be forming your spending habits based on the current month, which is still in flux.

• Don’t forget to deduct taxes. One common mistake that new business owners face is forgetting to set aside money for taxes each month. Depending on how your business is structured, you’ll want to set aside between 30 – 35% of your net business income (after expenses) on a monthly basis into a separate bank account. This will ensure you have the funds on hand to pay quarterly estimates. Pay yourself after you’ve set aside for taxes or ensure a portion of the taxes are factored in to being withheld from your paycheck if you’re also doing payroll.

• Pay yourself a set amount. This is my method of choice. Instead of zeroing in on a percentage of income to pay yourself, simply choose to give yourself a salary and decide on an amount to be paid at the same time each month. To do this, you can schedule automatic transfers from your business account to your personal checking account. Any excess funds can build up in your business account and act as a buffer when times slow down. You can modify the amount if you find yourself earning more or less over time.

• Your salary depends on how your business is structured. Sole proprietors have the most freedom in how they’re paid. You can transfer money every time your invoice is paid or once a month. Those with other business structures may have strict rules on how they’re paid, especially s-corps or corporations. Make sure to consult an accountant to verify that you’re paying yourself correctly per government regulations.

• Change your tax structure and get paid differently. While many business owners start as sole proprietors, they may decide to change their business entity once they become more established. Some structures require that you pay yourself a fair market wage and then receive any remaining profits, which will be taxed at a lower rate. This can save you money on taxes, but can also get more complicated. Consult a tax professional who can tell you what forms to file and how much of a salary to draw.

• Keep separate bank accounts. Having separate bank accounts is a must for any business, no matter if you’re working alone or with a small team. A business account provides proof to the IRS that you have a business and not just a hobby. When it comes to getting your paycheck, you can schedule automatic transfers from your business account to your personal account or do it manually every time a client pays you. You should also use a business credit card for all expenses and use a personal credit card for your regular spending. This will also help you divide your expenses when tax time comes.

• Consider business and personal goals. When it comes to determining how much money you’d like to or need to take home from your business, be sure to consider your personal lifestyle expenses along with the goals you have for your business. Can you reduce your take-home pay while you invest in team growth and putting systems in place? Can you reduce your personal lifestyle expenses and goals while you build your business? What are you hoping to achieve in your personal and professional life in the next year to three years? Are you setting aside for those things? Be sure to consider how outside factors can influence your pay and adjust where necessary.