One of the most important things you can do for yourself, and your business, is to pay yourself legally and consistently. Easier said than done, right? But just because it isn’t easy doesn’t mean it can’t be done. It absolutely can be and I’m going to give you tips for how to start paying yourself sooner than later.
Whether you’re just starting out in business and don’t have a steady income yet, or are experienced and making money consistently, you’ll get recommendations for what to do before you start paying yourself, the difference between paying yourself as an LLC and as an S Corp, and why consistency is key.
What to do before you start paying yourself a salary
Before going into the details on paying yourself, it’s important to understand that profit is not the same as revenue. Legally speaking, your revenue is not your income. Your income is what you report on your personal income tax return.
And just because you have money left over after business expenses have been deducted doesn’t mean you should pull all of that out as income. Something that has really worked to my advantage as a business owner is taking out just enough for what I need instead of taking everything out of the business.
Keeping this in mind, the road to paying yourself first starts with these 3 steps:
- Get a clear idea of your expenses
If you’re not already on top of your business finances, you’ll want to get there ASAP. A great place to start is getting as clear as possible on what your monthly and annual business expenses are.
Create a spreadsheet with all this information so you’ll know the minimum amount of revenue you need to clear every month to be profitable.
- Save for a rainy (business) day
Early on, I started saving up in my business bank account and eventually had enough to cover business expenses for several months, as well as a cushion.
Figure out how many months of business expenses (including taxes) you need to save toward to make you feel secure. Once you know the number, start working toward building up this savings. Even if you just put in $10 a week or $100 per month, it’s better than nothing and will get you into the habit of consistently putting money aside.
- Pay yourself something
After you save up a few months of expenses and perhaps a cushion, you can start paying yourself a portion of the profit that’s left over after expenses are taken care of.
How do you pay yourself as a Sole Proprietor or LLC?
To pay yourself as an LLC or sole proprietor, you can do one of two things:
1. Write yourself a check from your business account and cash it or deposit it into your personal account.
2. Do a digital transfer from your business account to your personal account.
If you’re already objecting to this idea because you’re earning close to nothing or because your revenue ebbs and flows, not to worry! Remember, the habit of paying yourself consistently is the goal, not the amount you pay yourself.
When I started out, the amount I paid myself (the owner’s draw) was low. Some checks were for $100 or $500 but, as my business grew, the amount I was able to pay myself increased.
How do you pay yourself as an S-Corp?
As my business’ profits were steadily growing, I kept incrementally increasing my owner’s draw. Eventually, I elected to be taxed as an S-corp.
While there are certain tax advantages you get when you file as an S-corp, it’s only worth going through all the work required to set it up once your business is considerably profitable and you’re able to pay yourself a reasonable salary consistently.
Even though you pay yourself a consistent salary with S-corp tax status, you can still take out owner’s draws on top of your payroll. But, as with a sole proprietorship or an LLC, draws don’t count as a business expense and, therefore, don’t reduce your taxable income. Keep this in mind whenever you’re thinking about cutting a random check to yourself on top of your regular payroll checks.
I personally get a consistent payroll check twice a month and will sometimes elect to cut myself a random check – but I don’t make a habit out of it.
Do business owners need to pay themselves a consistent salary?
In the beginning, paying yourself doesn’t have to be consistent. It can ebb and flow but, in general, the goal is to work towards some consistency as soon as possible. Doing so will give you some stability and serve to build substantial savings over time.
Figure out the amount you want to draw every month (e.g., $3K per month). To determine a reasonable amount, start looking at the money coming in and going out of your business each month to get a better understanding about your revenue flow. Identify any recurring payments, taxes, and other expenses to predict what your revenue will be. It has to be a number that leaves enough money to pay all your other expenses.
After 3 months of consistently paying yourself the set amount you decided on, reassess. If your business is doing better, perform another analysis to determine if you can confidently start paying yourself more regularly. Then commit to paying yourself this increased amount for however many months you feel confident you can do.
Why is it Important to Pay Yourself?
Getting into the habit of paying yourself regularly, no matter how small the amount, will benefit you in the long run. When you focus on this consistent low and slow method and only pay yourself what you can afford to live off right now, it really pays off over time.
And if you’re not there yet because you’re not making enough, stick with it. This is how to build a truly sustainable business and I know you can do it too!
While you’re getting set up to pay yourself more consistently and intentionally, take time to watch my free legal workshop called “5 Steps to Legally Protect & Grow Your Online Business”. The tips you’ll get in this training will further help you set your business up for success.
You’re only 60 minutes away from the peace of mind that comes with having a legally sound business…