How to Pay Yourself
As a small business owner, you have a lot of other expenses to think about and sometimes you may be the only employee in your business and that means you don't prioritize paying yourself - but you need to get paid like anyone else would! Otherwise you're not running a sustainable business, you could have cash flow problems and you're going to get resentful and burned out. We want to encourage you to take care of yourself financially and show you how.
Bookkeeping is the foundation for paying yourself - you need to know your numbers
Most CPAs only meet with clients a few times a year - or less. Most of the time, business owners are left on their own to navigate their finances. This may still leave you confused around how to implement a bookkeeping system, how to pay yourself and how to increase profit.
As soon as you start a business, you can hire a bookkeeper, to be sure you're starting off on the right foot - this is an investment in your business.
Once your business is covering expenses and generating profit, you will have the numbers and data in front of you and you can start paying yourself and feel really good about it.
How to pay yourself?
The next question is, how to pay yourself? This will be different for everyone and it depends on the tax structure of your business:
An LLC stands for Limited Liability Company and it is a legal entity that protects your personal assets. LLC taxes are attached to your personal return (1040) and put on a Schedule C. Owners get paid through drawing money from the account (Owner's Draw) - business account transferred to personal account. All net income is subject to self employment tax (combination of Social Security & Medicare tax at 15.3%).
An S Corp is a tax status. Usually it's an LLC electing to file as an S Corp (talk to your CPA to decide when it's best for you to become an S Corp). Owners get paid a salary through Payroll and can take distributions as well. A benefit is that only the Payroll is subject to Social Security and Medicare tax (15.3%).
A Sole Proprietor status is simplified tax filing. As a sole proprietor, you report your business income and expenses on your personal tax return (Form 1040). There is no separate tax return for your business. You will pay self-employment taxes, based on your net business income, which cover Social Security and Medicare contributions. You can pay yourself by taking money out of your business earnings. You'll need to be sure to have two separate bank accounts for personal and business, and to keep track of your business expenses vs personal expenses. This will make it clear how much you can pay yourself and still cover business expenses.
When to pay yourself?
Choose a payroll schedule that won't cause cash flow problems. It will be weekly, biweekly, monthly, whatever is right for you - you can verify your state and industry payday requirements on the Department of Labor (DOL) website. For owner's draws, you can take them when it's convenient for you, but having a set schedule is helpful.
When paying yourself a draw, you don't withhold from your earnings, so you file your estimated taxes four times a year. You could save 30-40% of your pay to make sure you're covering everything.
We are glad that you're wanting to learn about how to pay yourself and we are here to help! Good bookkeeping is the key to financial health. We love supporting small businesses. Get a free estimate today.
