No business owner should be working with unreliable income. Follow my advice and you’ll know how to pay yourself as a business owner consistently from an appropriate business checking account.
Is your salary your lowest priority? It shouldn’t be. There are so many clear benefits to giving yourself a consistent paycheck, such as peace of mind, and stability to name a few. You should be able to pay yourself consistently and never miss a paycheck. It sounds great, but want to know the practicals and how to actually do it? Read on!
How To Pay Yourself As A Small Business Owner
If you aren’t earning a consistent income, you are not alone. Lots of business owners don’t know the best way to pay themselves. Even if they do pay themselves, many business owners don’t have a system set up in which they can pay themselves regularly.
In fact, one of the most common things I hear is something along the lines of “I can’t pay myself consistently because I have a seasonal business or sometimes experience a slow month.” That makes a lot of sense. How do you pay yourself when you don’t have any money coming in?
Well, you wouldn’t work for a boss who only paid you once in a while. So don’t treat yourself that way either. In this guide, I’ll show you how to pay yourself consistently and never miss a paycheck.
What is an owner’s draw?
Before we get too much into how to set up your accounts so you can earn a regular paycheck, I want to explain what an owner’s draw is. Chances are, you have heard this term before. Even if you haven’t, you have likely taken one!
An owner’s draw is basically when a business owner pops into his or her business account and pulls out an amount of funds for personal use outside of their regular paycheck. So, if you haven’t taken a paycheck in a while and all of a sudden realize you need grocery money, transferring money from your business account to pay for it is a classic owner’s draw.
This is pretty much how most small business owners pay themselves. The problem is that it is very unreliable and inconsistent.
How to Pay Yourself if You Own a Small Business
How you pay yourself depends a lot on what type of business you have (an S Corp or LLC) and what your tax liability is. This is so important. I know business owners who made 6 figures in their business, but they don’t pay themselves consistently!
Let’s look closely at how to pay yourself as a business owner.
Pay Out Of Your Profits Not Your Revenue
First, it’s very important to know the difference between your profits and revenue. You should always pay yourself out of your profits.
- Revenue includes every penny that your business brings in.
- Profit, however, is the amount that is left over after you pay your expenditures.
You need to use your revenue to pay your business expenses. After all the expenses are paid, then pay yourself out of the remaining profit.
This is what trips up a lot of business owners. If you find that after paying all your expenses you don’t have enough left over for your own paycheck, you need to reconfigure your business’s budget.
Determine Your Business Type
Another thing that’s really important when you decide how much and how often to pay yourself is what type of business you have.
Your business type determines what types of taxes you’ll pay, how much you’ll pay in taxes, and how you will pay yourself.
Types of businesses is a very in-depth topic. I’ll try to give a quick overview, but if you still have more questions please contact me. I’d love to explain all your options and help you pick the best one.
#1 Sole Proprietorship
While a sole proprietorship is the most popular type of business (because it seems to be the easiest to set up), it isn’t a legal business entity. A sole proprietorship basically means you own the business as yourself.
When you are a sole proprietorship, you are your business. There isn’t any difference between you and your business as far as taxes and liability are concerned. You are personally responsible for all the debts that your business has. For this reason, I do not recommend for any business to work as a sole proprietorship. In fact, when one of my clients says that’s what they file as, I immediately direct them to become an LLC (see more below).
You will have to pay a self-employment tax for things like Medicare and Social Security. Your business profits will be taxed as well as a personal income tax.
If you choose to remain a sole-proprietorship, you should write yourself a check from the business so you can keep track of your salary.
#2 Partnership
As the name implies, a partnership is when you co-own a business with two or more people. The partners all share liabilities for the debts. There are different types of partnerships you can choose from.
The good thing about partnerships is that everyone shares liabilities and you can all bring in more assets too.
#3 Limited Liability Company (LLC)
An LLC doesn’t have much to do with taxes, but it does protect you from being responsible for the liabilities of your business. That means that debtors can’t sue you personally for your business debts, they can only go after the business’s assets.
An LLC can be owned by one person or a group of people. I like to use LLCs instead of a sole proprietorship, as it affords you some legal protection and separates your personal assets from your business ones. For example, this can be a great choice for marketing consultants, freelance writers, or anyone that earns money as themselves.
#4 S Corporation
There are two different types of corporations a business can choose to be filed under. The first is an S Corporation. The S stands for “shareholders.” To qualify as an s corp, a business must have fewer than 100 shareholders.
The business itself isn’t taxed. Instead, the shareholders have to pay the income tax (based on their allocated share) on the profits and losses that pass through to their personal tax returns. Many small business owners prefer this business type because shareholders do not have to pay self-employment tax on their share of the profits.
#5 C Corporation
Finally, a C corporation is much larger. It doesn’t exactly match the definition of small business since it has an unlimited amount of shareholders that can buy and sell shares.
Lots of small businesses might want to be a C Corp because they have hopes of raising money and becoming publicly traded someday. This is a complicated one for taxes, so make sure to reach out to your certified public accountant (CPA) for help.
Take Out a Reasonable Contribution
When you are paying yourself, you might wonder how much to pay. To figure this out, compare it to other jobs like yours and then give yourself a reasonable salary.
Surprisingly, lots of small business owners don’t pay themselves enough. This is especially true for newer business owners that aren’t confident about their worth.
Write down all your responsibilities, and research how much people that do what you do earn. There isn’t one simple answer. The IRS recommends taking a “reasonable salary” but what is “reasonable?”
I suggest going the modest route. Take a smaller salary so that you get taxed on a lower amount and you’ll have more money left over to invest back into the company.
If you wanted a suggested percentage as a starting point, I have heard that about 40% of your profits is a reasonable salary. Again, there are a lot of “buts” on this stipulation.
If you have questions about the smartest salary for your business, talk to your accountant or reach out to me. As a financial and business coach, I’d love to discuss your current situation and help you figure out how much you should pay yourself.
Business Owner Salary
I often get asked what the average business owner pays himself or herself. As you can imagine, the answer varies wildly. According to this article on The Balance, the average business owner’s salary in the USA is about $59,000. Of course, how much you earn from your business will depend on where you live, your current liabilities, and how profitable your business is.
Print Paper Checks or Utilize Direct Deposit
Finally, when you pay yourself from your business, decide whether you are going to pay yourself via paper check or direct deposit. Make sure you are paying yourself from your business checking account to your personal one.
I should mention that some businesses also elect to pay themselves via a payroll service like Gusto.com, which will take out paycheck taxes for you.
I recommend that all business owners should have at least four bank accounts: business checking, personal checking, business savings, and personal savings. This will better help you keep track of your expenses, which is so important for taxes and to help you grow.
How To Pay Yourself – Value Your Contribution
Deciding how to pay yourself as a business owner is all about respecting your worth and valuing your contribution to your business. It’s like I always say, would you work for someone that only pays you once in a while? No! So don’t do that to yourself. You are worth so much more than that. Learning how to figure out your salary and when and how to pay it can feel overwhelming at first, but it’s a crucial part of running your small business with success and longevity.
Related Post: How to Pay Yourself
If you are unsure of how to actually pay yourself, I’ve got you covered with another post. Here’s everything you need to know about the tools and ways to pay yourself as a business owner.
