January 23, 2023
How to Pay Yourself as a Business Owner
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 isnât easy doesnât mean it canât be done. It absolutely can be and Iâm going to give you tips for how to start paying yourself sooner than later.
Whether youâre just starting out in business and donât have a steady income yet, or are experienced and making money consistently, youâll 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, itâs 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 doesnât 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 youâre not already on top of your business finances, youâll 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 youâll 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, itâs 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 thatâs 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 youâre already objecting to this idea because youâre 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 ownerâs 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 businessâ profits were steadily growing, I kept incrementally increasing my ownerâs 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, itâs only worth going through all the work required to set it up once your business is considerably profitable and youâre 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 ownerâs draws on top of your payroll. But, as with a sole proprietorship or an LLC, draws donât count as a business expense and, therefore, donât reduce your taxable income. Keep this in mind whenever youâre 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 â but I donât make a habit out of it.
Do business owners need to pay themselves a consistent salary?
In the beginning, paying yourself doesnât 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 youâre not there yet because youâre not making enough, stick with it. This is how to build a truly sustainable business and I know you can do it too!
While youâre getting set up to pay yourself more consistently and intentionally, take time to watch my free legal workshop called â5 Steps to Legally Protect & Grow Your Online Businessâ. The tips youâll get in this training will further help you set your business up for success.
Youâre only 60 minutes away from the peace of mind that comes with having a legally sound businessâŠÂ
So What Do you think?